Review of Behavioral Economics > Vol 4 > Issue 1

Rules vs. Discretion Under Computability Constraints

Roger Koppl, Syracuse University, USA,
Suggested Citation
Roger Koppl (2017), "Rules vs. Discretion Under Computability Constraints", Review of Behavioral Economics: Vol. 4: No. 1, pp 1-31.

Published: 11 Apr 2017
© 2017 R. Koppl
Economic Theory: Microeconomic Theory,  Economic Theory: Game Theory
JEL Codes: E52C72
Rules vs. discretionMonetary policyComputabilityBounded rationality

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In this article:
1. Introduction
2. The Rules vs. Discretion Debate
3. A Quick Overview of Computabilty and the Models of this Paper
4. Barro and Gordon Model
5. Three Simple Models of Discretionary Monetary Policy
6. Discussion
7. Conclusions


I describe a class of models for monetary policy in which rationality is bounded by the requirement of algorithmic computability. Essentially, I add a computability constraint to the canonical model of Barro and Gordon (1983b). Discretionary policy increases uncertainty for the public and makes it difficult for the policymaker to anticipate the public’s reactions to policy. With discretionary policy and computability-constrained agents the public and the policymaker are unable to outguess one another, and there is no rational procedure that ensures the convergence of expectations. When the policymaker follows a rule, however, expectations converge and uncertainty is reduced for both the public and the policymaker.