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

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 Eco...

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Bibliographic Details
Published in:Macroeconomic dynamics 2014-01, Vol.18 (1), p.175-198
Main Authors: Debortoli, Davide, Maih, Junior, Nunes, Ricardo
Format: Article
Language:English
Subjects:
Algorithms
Analysis
Business cycles
Central banks
Economic theory
Equilibrium
Governors
Interest rates
Macroeconomics
Monetary policy
Studies
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Summary: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.
ISSN:1365-1005
1469-8056
DOI:10.1017/S1365100512000326