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

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