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

Abstract

This paper reviews the distinction between the timeless perspective and discretionary modes of monetary policymaking, the former representing rule-based policy as formalized by Woodford (1999). In models with forward-looking expectations, this distinction is important because discretionary policymaking> produces a second inefficiency distinct from the familiar inflationary bias. The authors present calculations of the quantitative magnitude of this second inefficiency and find in all of the cases examined that the unconditional average performance of timeless perspective policymaking is at least as good as that provided by optimal discretionary behavior.