Security

Optimal Time-Invariant Monetary Policy

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Executive Summary

This paper investigates how best to determine time-invariant policy rules in macroeconomic models with forward-looking constraints, where fully optimal policy is known to be time-inconsistent. It proposes a new 'Coefficient optimisation' approach that improves upon the timeless perspective method of Woodford (2003) in deterministic problems, and on average in stochastic problems, without resorting to asymptotic ('Unconditional') loss comparisons. The time-inconsistency of optimal policy in environments characterised by forward-looking constraints was first brought to general attention by Kydland and Prescott (1977).

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