Conditionally Optimal Rules in a Simple Closed Economy Model Under Discretion and Commitment.

Using a simple dynamic, closed economy macroeconomic model, this paper compares optimal commitment rules and optimal discretionary rules with the Taylor rule and the Henderson and McKibbin rule. For some parameter values discretionary policy is found to lead to instability. This paper also explores the stabilizing properties of conditionally optimal rules -rules that use a limites state variable set to minimize the monetary's authority's objective function.