Abstract
Woodford (1999) develops the notion of a “timelessly optimal” pre-commitment policy. This paper uses a simple business cycle model to illustrate this notion. We show that timelessly optimal policies are not unique and that they are not necessarily better than the time-consistent solution. Further, we describe a method for constructing optimal precommitment rules in an environment where the policymaker does not know the initial state of the economy. This latter solution is useful for characterizing the benefits policymakers extract through exploiting initial conditions. • The views expressed in this paper are those of the author and do not necessary reflect those of
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More From: Federal Reserve Bank of San Francisco, Working Paper Series
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