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The B.E. Journal of Macroeconomics

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 Outdated optimal commitment plans versus discretionary policymaking

Christian Jensen
  • Corresponding author
  • Department of Economics, University of South Carolina, 1014 Greene Street, Columbia, SC 29208, USA
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Published Online: 2018-09-26 | DOI: https://doi.org/10.1515/bejm-2018-0035

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.

Keywords: commitment; discretion; expectations; policy rules

JEL Classification: E61; H30; E52

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About the article

Published Online: 2018-09-26


Citation Information: The B.E. Journal of Macroeconomics, 20180035, ISSN (Online) 1935-1690, DOI: https://doi.org/10.1515/bejm-2018-0035.

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