DP515 Should Rules be Simple?

Author(s):	Paul L Levine
Publication Date:	March 1991
Keyword(s):	Credibility, Learning, Rational Expectations, Simple Rules
JEL(s):	023, 026, 321
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=515

The principal argument of the paper is that in an incomplete information setting, where the private sector lacks information on goverment objectives and has to learn about the policy rule by direct observation and estimation, simple `sub-optimal' rules may outperform the more complicated rule that is optimal under complete information. This result is demonstrated by simulations using an overlapping contract rational expectations model. The paper thus provides some formal reasoning to support arguments for simplicity associated with credibility and the need for the private sector to be able to monitor policy.