Rules Rather than Discretion: The Inconsistency of Optimal Plans
@article{Kydland1977RulesRT,
title={Rules Rather than Discretion: The Inconsistency of Optimal Plans},
author={Finn E. Kydland and Edward C. Prescott},
journal={Journal of Political Economy},
year={1977},
volume={85},
pages={473 - 491}
}Even if there is an agreed-upon, fixed social objective function and policymakers know the timing and magnitude of the effects of their actions, discretionary policy, namely, the selection of that decision which is best, given the current situation and a correct evaluation of the end-of-period position, does not result in the social objective function being maximized. The reason for this apparent paradox is that economic planning is not a game against nature but, rather, a game against rational…
7,737 Citations
Discretion Rather than Rules? Binding Commitments versus Discretionary Policymaking
- Economics
- 2016
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 gains from surprise…
Discretion rather than rules? Outdated optimal commitment plans versus discretionary policymaking
- EconomicsThe B.E. Journal of Macroeconomics
- 2018
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…
Recent Developments in the Theory of Rules versus Discretion
- Economics
- 1986
policymaker. This perspective on rules versus discretion was changed by Kydland and Prescott (1977), who looked at rules as a form of commitment. A commitment amounts to a binding contract, which…
WORKING PAPERS Collective Commitment
- Economics
- 2015
We consider collective decisions made by agents whose preferences and power depend on past events and decisions. Faced with an inefficient equilibrium and an opportunity to commit to a policy, can…
Delegation and discretion
- Economics
- 1994
There are many situations in which a principal delegates decisions to a better-informed agent but does not choose to give full discretion. This paper discusses one reason why this might be desirable:…
Collective Commitment ∗
- Economics
- 2016
Consider collective decisions made by agents with evolving preferences and political power. Faced with an inefficient equilibrium and an opportunity to commit to a policy, can the agents reach an…
Optimal Fiscal and Monetary Policy (without commitment)
- Economics
- 2010
Most of the results of optimal taxation literature in the Ramsey framework are derived under the assumption of commitment. Commitment is usually defined as ability of a government to bind future…
Discretion Rather than Simple Rules: the Case of Social Protection
- Economics
- 2014
We present a simple model of a benevolent government that provides insurance to risk averse individuals. As in macroeconomics, commitment to fully contingent rules is better than discretion, but when…
References
SHOWING 1-10 OF 22 REFERENCES
Rational Expectations and the Theory of Price Movements
- Economics
- 1961
In order to explain fairly simply how expectations are formed, we advance the hypothesis that they are essentially the same as the predictions of the relevant economic theory. In particular, the…
Monetary Policy during a Transition to Rational Expectations
- EconomicsJournal of Political Economy
- 1975
In standard macroeconomic models incorporating the natural rate hypothesis and rational expectations, monetary policy has no effect on real variables. But the rational expectations assumption that…
On Second-Best National Saving and Game-Equilibrium Growth
- Economics
- 1968
This chapter highlights the question whether second-best saving is greater or smaller than first-best saving when given future saving is non-optimal from the standpoint of the present generation. The…
Investment Under Uncertainty
- Business
- 1971
Economics defines investment as the act of incurring an immediate cost in the expectation of future rewards. Firms that construct plants and install equipment, merchants who lay in a stock of goods…
Adjustment Costs and the Theory of Supply
- EconomicsJournal of Political Economy
- 1967
T ills paper contains a re-examination from a dynamic point of view of some familiar problems in the theory of supply. In particular, it is concerned with the response of firms in a competitive…
Capital Theory and Investment Behavior
- Economics
- 1963
Tax policy and investment behaviour: tax policy and the cost of capital services, estimates of the parameters of the investment function, the effects of tax policy on investment behaviour, Robert E.…
Noncooperative and Dominant Player Solutions in Discrete Dynamic Games
- Economics
- 1975
Noncooperative and Dominant Player Solutions in Discrete Dynamic Games Author(s): Finn Kydland Source: International Economic Review, Vol. 16, No. 2 (Jun., 1975), pp. 321-335 Published by: Wiley for…