Timeless Perspective Policymaking: When is
Discretion Superior?*
Richard Dennis^
Federal Reserve Bank of San Francisco
First version: September, 2008
This version: December, 2008
Abstract
In this paper I show that discretionary policymaking can be superior to timeless perspective
policymaking and identify model features that make this outcome more likely. Developing
a measure of conditional loss that treats the auxiliary state variables that characterize the
timeless perspective equilibrium appropriately, I use a New Keynesian DSGE model to
show that discretion can dominate timeless perspective policymaking when the Phillips
curve is relatively flat, due, perhaps, to firm-specific capital (or labor) and/or Kimball
(1995) aggregation in combination with nominal price rigidity. These results suggest that
studies applying the timeless perspective might also usefully compare its performance to
discretion, paying careful attention to how policy performance is evaluated.
Keywords: Discretion, timeless perspective, policy evaluation.
JEL Classification: C61, E52, E58.
*I would like to thank Jinill Kim, Stephen Sauer, Andrea Tambalotti, and participants at the Norges Bank
Workshop on Optimal Monetary Policy, 2008, for comments. The views expressed in this paper do not
necessarily reflect those of the Federal Reserve Bank of San Francisco or the Federal Reserve System.
^Address for Correspondence: Economic Research, Mail Stop 1130, Federal Reserve Bank of San Francisco,
101 Market St, CA 94105, USA. Email: richard.dennis©sf.frb.org.