The Role of Economic Policy after the New Classical Macroeconomics
The paper considers the implications of the rational expectations New Classical Macroeconomics revolution for the 'rules versus discretion' debate. The following issues are covered: 1) The ineffectiveness of anticipated stabilization policy, 2) Non-clausal models and rational expectations, 3) Optimal control in non-causal models -- the inconsistency of optimal plans. I established the robustness of the proposition that contingent (closed-loop or feedback) rules dominate fixed (open-loop)rules. The optimal contingent rule in non-causal models -- the innovation or disturbance-contingent feedback rule -- is quite different from the state-contingent feedback rule derived by dynamic stochastic programming.