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LOOSE COMMITMENT IN MEDIUM-SCALE MACROECONOMIC MODELS: THEORY AND APPLICATIONS

Published online by Cambridge University Press:  30 August 2012

Davide Debortoli ,
Junior Maih  and
Ricardo Nunes
Davide Debortoli
Affiliation:
University of California San Diego
Junior Maih
Affiliation:
International Monetary Fund
Ricardo Nunes*
Affiliation:
Board of Governors of the Federal Reserve System
*
Address correspondence to: Ricardo Nunes, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW, Washington, DC 20551, USA; e-mail: ricardo.p.nunes@frb.gov.
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Abstract

This paper proposes a method and a toolkit for solving optimal policy with imperfect commitment. As opposed to the existing literature, our method can be employed in the medium- and large-scale models typically used in monetary policy. We apply our method to the Smets and Wouters model [American Economic Review 97(3), 586–606 (2007)], for which we show that imperfect commitment has relevant implications for interest rate setting, the sources of business cycle fluctuations, and welfare.

Keywords

CommitmentDiscretionMonetary Policy

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 1 , January 2014 , pp. 175 - 198
Copyright
Copyright © Cambridge University Press 2012 

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