Rules Rather than Discretion: The Inconsistency of Optimal Plans
Abstract
Even if there is an agreed-upon, fixed social objective function and policymakers know the timing and magnitude of the effects of their actions, discretionary policy, namely, the selection of that decision which is best, given the current situation and a correct evaluation of the end-of-period position, does not result in the social objective function being maximized. The reason for this apparent paradox is that economic planning is not a game against nature but, rather, a game against rational economic agents. We conclude that there is no way control theory can be made applicable to economic planning when expectations are rational.
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The economic theory case for central bank independence rests on the time inconsistency argument.
“The economic theory case for CBI rests on the argument of time inconsistency (Barro and Gordon 1983;Kydland and Prescott 1977).”
From Independent Agencies, Distribution, and Legitimacy: The Case of Central Banks (2020) · cites this paper as Kydland and Prescott 1977
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- Authors
- Kydland, F. E., & Prescott, E. C.
- ORCID
- Kydland, Finn E.
- Venue
- Journal of Political Economy
- Publisher
- University of Chicago Press
- Published
- 1977-06
- Volume
- 85
- Issue
- 3
- Pages
- 473-491
- ISSN
- 0022-3808 (ISSN-L)
- 1537-534X
- OpenAlex
- W2169417293
- Cited by
- 7,905
- References
- 0
- Citations by year
- 2026: 171 · 2025: 235 · 2024: 163 · 2023: 239 · 2022: 207 · 2021: 191 · 2020: 286 · 2019: 254 · 2018: 222 · 2017: 223 · 2016: 250 · 2015: 238 · 2014: 268 · 2013: 277 · 2012: 277
- FWCI
- 84.94
- Type
- journal article
- Language
- en
- Open access
- closed
- Locations
- Journal of Political Economy (publishedVersion)
- Topics
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Economic theories and models
- Social Sciences › Economics, Econometrics and Finance › General Economics, Econometrics and Finance › Monetary Policy and Economic Impact
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Economic Theory and Institutions
- Keywords
- optimal planning, discretionary policy, rules versus discretion, rational expectations, economic planning, control theory, policy inconsistency
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