TY  - JOUR
AU  - McCallum,Bennett T.
AU  - Nelson,Edward
TI  - Timeless Perspectives vs. Discretionary Monetary Policy In Forward-Looking Models
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7915
PY  - 2000
Y2  - September 2000
UR  - http://www.nber.org/papers/w7915
L1  - http://www.nber.org/papers/w7915.pdf
N1  - Author contact info:
Bennett T. McCallum
Tepper School of Business, Posner 256
Carnegie Mellon University
Pittsburgh, PA 15213
Tel: 412/268-2347
Fax: 412/268-6830
E-Mail: bm05@andrew.cmu.edu

Edward Nelson
Federal Reserve Board
Mail Stop 76, Monetary Affairs
20th and C Streets, N.W.
Washington, DC 20551
E-Mail: edward.nelson@frb.gov
AB  - 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, this distinction is greater than in the models that have been typical in the rules-vs.-discretion literature; typically there is a second inefficiency from discretionary policymaking, distinct from the  familiar inflationary bias.  The paper presents calculations of the quantitative magnitude of this second inefficiency, using calibrated models of two types prominent in the current literature.  In addition, it examines the distinction between instrument rules and targeting rules; the results indicate that targeting-rule outcomes can be very closely approximated by instrument rules. Also included is a brief investigation of operationality issues, involving the unobservability of current output and the possibility that an incorrect concept of the natural-rate level of output, essential in measuring the output gap, is used by the policymaker.  In all of the cases examined, the unconditional average performance of timeless perspective policymaking is at least as good as that provided by optimal discretionary behavior.
ER  -