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Rules Rather than Discretion: The Inconsistency of Optimal Plans

Finn E. Kydland and Edward C. Prescott
Journal of Political Economy
Vol. 85, No. 3 (Jun., 1977), pp. 473-492
Stable URL: http://www.jstor.org/stable/1830193
Page Count: 19
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Rules Rather than Discretion: The Inconsistency of Optimal Plans
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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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