Discussion paper

DP2752 Timeless Perspective Vs Discretionary Monetary Policy in Forward-Looking Models

This Paper reviews the distinction between the timeless perspective and discretionary modes of monetary policymaking, the former representing rule-based policy as recently formalized by Woodford (1999b). In models with forward-looking expectations there is typically a second inefficiency from discretionary policymaking, besides the inflationary bias. The Paper presents calculations of the quantitative magnitude of this second inefficiency, using calibrated models of two prominent types; it examines the distinction between instrument rules and targeting rules; and briefly investigates operationality issues involving the unobservability of current output and the possibility that an incorrect concept of the natural-rate level of output is used by the policymaker.

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Citation

McCallum, B and E Nelson (eds) (2001), “DP2752 Timeless Perspective Vs Discretionary Monetary Policy in Forward-Looking Models”, CEPR Press Discussion Paper No. 2752. https://cepr.org/publications/dp2752