Working Paper: CEPR ID: DP9731
Authors: Ivan Petrella; Raffaele Rossi; Emiliano Santoro
Abstract: This paper contributes to a recent debate about the structural and institutional conditions under which discretion may be superior to timeless perspective. We show this is unlikely when the policy maker relies on a welfare-theoretic loss function obtained as a second-order approximation of households? utility, even in the presence of features that should enhance the relative performance of discretionary policy-making in the baseline New Keynesian model. This result stands in contrast to the existing studies, whose analysis has typically relied on ad hoc welfare criteria that reflect neither households? preferences, nor the degree of rigidity in price-setting.
Keywords: discretion; loss of social welfare; monetary policy; timeless perspective
JEL Codes: E23; E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increasing nominal rigidity (E31) | slope of the New Keynesian Phillips Curve (NKPC) (E12) |
| slope of the New Keynesian Phillips Curve (NKPC) (E12) | discretion favored over timeless perspective (D15) |
| input materials in production (E23) | slope of the New Keynesian Phillips Curve (NKPC) (E12) |
| discretion dominates timeless perspective (D15) | under conditions of input materials in production (L23) |
| weight on consumption stabilization (E21) | discretion's performance relative to timeless perspective (D15) |