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advantage from exploiting initial conditions has long since evaporated.

Timeless perspective policies have a certain attraction insomuch as they are both optimal
and time consistent—from the timeless perspective. However, timeless perspective policies
are neither optimal nor time consistent in the sense of Kydland and Prescott (1977, 1980). As
a consequence, timeless perspective policies face credibility problems, such that it is unclear
whether they can feasibly be implemented, and it is not obvious whether they are necessarily
superior to discretion.

2.1 A simple example

To make timeless perspective policymaking concrete, consider the following simple example.
The central bank’s optimization problem is to choose the sequence of nominal interest rates
{it}to minimize

E0 Σ βt (πt + Mt + "it) ,                            (1)

t=0

where πt denotes inflation, yt denotes the output gap, β (0,1) denotes the subjective discount
factor, and
μ [0, ) and v [0, ) denote the relative weights on output and interest
rate stabilization relative to inflation stabilization, respectively, and E
o is the mathematical
expectations operator conditional on period
0 information. Under certain circumstances,
equation (1) can be viewed as a second-order accurate approximation to household welfare
(Benigno and Woodford, 2006). For the purposes of this section, however, I will simply take
equation (1) to be primal.

Constraining the central bank’s optimization problem are

πt  =  βEtπt + κyt + ut,                                  (2)

yt  =  Etyt+ι - σ (it - Et¾+ι) + r",                         (3)

ut+ι  =  Puut + ⅛t+ι,                                          (4)

rt+ι  =  Pr rt + ert+ι                                              (5)

where ut denotes a markup shock, rdenotes a neutral rate shock, and the initial conditions
u
o and rθ are known. The innovations eut and ert are assumed to be i.i.d. with zero mean and
finite variance. Equation (2) is the New Keynesian Phillips curve associated with Calvo-pricing
(Calvo, 1983). Equation (3) is the standard consumption-Euler equation that, abstracting
from government spending, investment, and trade, is written in terms of the output gap.
Equations (4) and (5) describe the laws of motion for the markup shock and the neutral



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