Loose Commitment in Medium-Scale Macroeconomic Models: Theory and an Application

28 Pages Posted: 9 Jan 2011

See all articles by Davide Debortoli

Davide Debortoli

Universitat Pompeu Fabra - Department of Economics and Business; Barcelona Graduate School of Economics (Barcelona GSE)

Junior Maih

Norges Bank

Ricardo Cavaco Nunes

Federal Reserve Banks - Federal Reserve Bank of Boston

Date Written: 2010

Abstract

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

Keywords: Commitment, Discretion, Linear-Quadratic

JEL Classification: C32, E58, E61

Suggested Citation

Debortoli, Davide and Maih, Junior and Nunes, Ricardo Cavaco, Loose Commitment in Medium-Scale Macroeconomic Models: Theory and an Application (2010). Norges Bank Working Paper 2010/25 , Available at SSRN: https://ssrn.com/abstract=1735395 or http://dx.doi.org/10.2139/ssrn.1735395

Davide Debortoli

Universitat Pompeu Fabra - Department of Economics and Business ( email )

Barcelona
Spain

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Junior Maih (Contact Author)

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Ricardo Cavaco Nunes

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

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