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posted on 10.11.2009by Juan Paez-Farrell
It is often assumed that monetary policy in forward looking models yields higher welfare, measured in terms of the unconditional loss, when it operates under the timeless perspective than under discretion. This paper consider the robustness of such a result in a New Keynesian model when the degree of intrinsic inflation persistence is misperceived by the policymaker. It finds that for reasonable parameter values discretion can be superior to the timeless perspective. The reason for this stems from the fact that the timeless perspective policy varies more with the degree of inflation persistence than does the discretionary policy.