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Discretion rather than rules? Outdated optimal commitment plans versus discretionary policymaking

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  • Jensen Christian

    (Department of Economics, University of South Carolina, 1014 Greene Street,Columbia, SC 29208, USA)

Abstract

Because optimal plans are time-inconsistent, continuing one from a previous period is not optimal from today’s perspective, and may not outperform discretion, even ignoring surprise deviations. Hence, a once-and-for-all commitment to the optimal plan from a particular period does not always outperform discretion over time, even if superior from the perspective of the original period. Forward-looking policymakers might therefore not want to bind themselves to the optimal plan from any period. The vast literature on commitment strategies illustrates that it is a common misconception that a once-and-for-all commitment to the optimal plan is always preferable to discretion.

Suggested Citation

  • Jensen Christian, 2020. "Discretion rather than rules? Outdated optimal commitment plans versus discretionary policymaking," The B.E. Journal of Macroeconomics, De Gruyter, vol. 20(1), pages 1-9, January.
    • Handle: RePEc:bpj:bejmac:v:20:y:2020:i:1:p:9:n:17
    DOI: 10.1515/bejm-2018-0035
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    References listed on IDEAS

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    More about this item

    Keywords

    commitment; discretion; expectations; policy rules;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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