The Non-Optimality of Proposed Monetary Policy Rules Under Timeless-Perspective Commitment

11 Pages Posted: 11 Apr 2002 Last revised: 12 Apr 2002

See all articles by Christian Jensen

Christian Jensen

Southern Methodist University (SMU) - Dedman College of Humanities and Sciences

Bennett T. McCallum

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

Date Written: April 2002

Abstract

Several recent papers have usefully emphasized the inefficiency that arises from discretionary monetary policymaking, relative to optimal policy from a 'timeless perspective,' in macroeconomic models with forward-looking private behavior. The inefficiency in question is in terms of average outcomes of the conditional expectation of a policy objective that reflects the discounted present value of current and future period losses (which involve squared deviations of inflation and output from specified target levels). In the literature, most of the analysis has been conducted in an optimizing model that features a Calvo-Rotemberg price adjustment equation that includes a 'cost-push' shock term. This literature suggests that policy, which keeps inflation equal to a negative multiple of the change in the output gap, is optimal with respect to the criterion mentioned above -- the unconditional expectation of the policymaker's objective function. Results reported here show, however, that this is not the case -- that an alternative policy rule, suggested by the approach of 'policy design' rather than by 'optimal control,' delivers superior results.

Suggested Citation

Jensen, Christian and McCallum, Bennett T., The Non-Optimality of Proposed Monetary Policy Rules Under Timeless-Perspective Commitment (April 2002). NBER Working Paper No. w8882. Available at SSRN: https://ssrn.com/abstract=307119

Christian Jensen

Southern Methodist University (SMU) - Dedman College of Humanities and Sciences ( email )

Dallas, TX 75275
United States

Bennett T. McCallum (Contact Author)

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

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-2347 (Phone)
412-268-7357 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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