The name is absent

cretion dominates timeless perspective policymaking increases monotonically with the weight
on output gap stabilization. The main conclusions to take away from Figure 2 are that,
although the improvement in loss may be small, discretion is more likely to perform better
than timeless perspective policymaking when the Phillips curve is relatively flat and when the
weight on output gap stabilization is relatively large.

5 A small-scale DSGE model

In the previous section, I analyzed a simple New Keynesian model and found that discretion
could be superior to timeless perspective policymaking. In this section, I undertake a broader
analysis using a more sophisticated business cycle model that contains a wider array of shocks
and propagation mechanisms. Importantly, the model contains margins for substitution and
mechanisms for propagating shocks that are present in most modern New Keynesian business
cycle models. As with the simple model, I find that discretion can be superior to timeless
perspective policymaking. Next, I extend this DSGE model to include features, such as
firm-specific labor markets and Kimball (1995) aggregation, that are increasingly employed in
DSGE models. I show that these modeling features and others like them raise the likelihood
that discretion will dominate timeless perspective policymaking.

5.1 The model

Let the economy be populated by households, intermediate-good producing firms, final-good
producing firms, and a central bank. Households are identical and infinitely lived, choosing
consumption, c_t, investment, it, labor, It, and nominal holdings of next period bonds, ⅛+ι, to

where {σ, χ} ∈ (0, ∞) represent the (inverse) elasticity of intertemporal substitution and the

Frisch labor supply elasticity, respectively, subject to the budget constraint

^ct ^{+ i}t ⁺—=~ = Wtlt ⁺ Rtkt ^{+ (1 +} "∏) yy ⁺ Dt^{,                   (41)}

^pt                       ^pt

and the accumulation equation

^kt+1 = ^{(1 —} ^^{) k}t ^{+ i}t^,

where δ ∈ (0,1) represents the depreciation rate. In equations (41) and (42), W_t denotes
the consumption real wage, Rt denotes the real rental rate of capital, kt, Pt denotes the price

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