What Is the Proper Perspective for Monetary Policy Optimality?

In forward-looking models for monetary policy analysis, the conditions for full conditional optimality are not time invariant, and as a conse-quence imply an incentive each period for the central bank to depart from its previous optimized plan. The conditional “commitment ” plan is therefore strategically incoherent. Discretionary optimality does not have this problem, but yields inferior performance. A “timeless perspective” policy rule proposed by Woodford (1999, 2003) is intended to overcome the incoherence and noncredibility of the commitment plan while yield-ing performance superior to that of discretionary policy behavior; this rule has received much attention. A fourth “fully timeless ” alternative differs slightly from the timeless perspective rule; it is unambiguously superior from an unconditional perspective but does not dominate from the conditional perspective. The paper discusses comparisons at some length and briefly considers the sustainability of these policy strategies