Timeless Perspective vs. Discretionary Monetary Policy in Forward-Looking Models

42 Pages Posted: 17 Apr 2001

See all articles by Bennett T. McCallum

Bennett T. McCallum

Carnegie Mellon University - David A. Tepper School of Business; National Bureau of Economic Research (NBER)

Edward Nelson

Board of Governors of the Federal Reserve System

Date Written: March 2001

Abstract

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.

Keywords: Discretion, expectations, policymaking, rules

JEL Classification: E30, E52, E58

Suggested Citation

McCallum, Bennett T. and Nelson, Edward, Timeless Perspective vs. Discretionary Monetary Policy in Forward-Looking Models (March 2001). CEPR Discussion Paper No. 2752, Available at SSRN: https://ssrn.com/abstract=267147

Bennett T. McCallum (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

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National Bureau of Economic Research (NBER)

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Edward Nelson

Board of Governors of the Federal Reserve System ( email )

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