A Graphical Exposition of the Inconsistency of Optimal Monetary Plans

Abstract: The author presents a geometrical framework in which the inability of discretionary policy (consistent policy in the sense of Kydland and Prescott) to be socially optimal is demonstrated. Policy based on a rule results in a higher level of utility. The author extends the model to demonstrate that policy of a Rogoff conservative central banker results in approaching the same equilibrium as that from a monetary rule. Finally, the framework shows that attempts to exploit the Phillips curve result in stagflation.