Munich Personal RePEc Archive

Discretion Rather than Rules? Binding Commitments versus Discretionary Policymaking

Jensen, Christian (2016): Discretion Rather than Rules? Binding Commitments versus Discretionary Policymaking.

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Abstract

Because optimal plans are time-inconsistent, continuing one from a previous period is not optimal from today's perspective, and may not outperform discretion, even ignoring gains from surprise deviations. Hence, contrary to conventional wisdom, a binding and credible commitment does not always outperform discretion over time, even if a non-credible commitment does. Forward-looking policymakers might therefore not want to irrevocably bind themselves to the optimal plan from any particular period, even if they could. The vast literature proposing different commitment mechanisms illustrates that it is a common misconception that a credible commitment to the optimal plan is always preferable to discretion.

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