The name is absent

D: Substitution elasticity

Fig. 3

Figure 3 reveals that the performance of discretion relative to timeless perspective policy-
making declines as a and σ increase and increases as ξ, ε, χ, and μ increase. Since higher
values of ξ imply a flatter Phillips curve, the results in Figure 3B are consistent with those in
Figure 2A. With respect to a, σ, ε, and χ, whether changes in these parameters help or hin-
der discretion turns primarily on how they alter the trade-off the central bank faces between
stabilizing inflation and stabilizing the gap, with factors that worsen the trade-off helping
discretion. Thus, the relative performance of discretion improves for higher values of χ and μ
and for lower values of σ. With respect to ε, higher values of ε help discretion because they
lower the steady-state consumption share of output, weakening the policy channel operating
on real marginal costs through consumption and wages. The effects of changes in a are more
complicated. Higher values for a help discretion because they lower the steady-state share
of consumption in output and because they weaken the policy channel operating on real mar-
ginal costs through consumption and wages. However, higher values of a also strengthen the
policy channel operating on real marginal costs through the real rental rate, and, since interest
rates have a large effect on the rental rate of capital, this effect tends to dominate. Figure 3
further reveals that the parameter space for which discretion dominates timeless perspective

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