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Escaping expectation traps: How much commitment is required?

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  • Himmels, Christoph
  • Kirsanova, Tatiana

Abstract

We study the degree of precommitment that is required to eliminate multiplicity of policy equilibria, which arise if the policy maker acts under pure discretion. We apply a framework developed by Schaumburg and Tambalotti (2007) and Debertoli and Nunes (2010) to a standard New Keynesian model with government debt. We demonstrate the existence of expectation traps under limited commitment and identify the minimum degree of commitment which is needed to escape from these traps. We find that the degree of precommitment which is sufficient to generate uniqueness of the Pareto-preferred equilibrium requires the policy maker to stay in office for a period of two to five years. This is consistent with monetary policy arrangements in many developed countries.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 3 ()
Pages: 649-665

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:3:p:649-665

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Limited commitment; Commitment; Discretion; Multiple equilibria; Monetary and fiscal policy interactions;

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References

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Cited by:
  1. Xiaoshan Chen & Tatiana Kirsanova & Campbell Leith, 2013. "How Optimal is US Monetary Policy?," Working Papers 2013_08, Business School - Economics, University of Glasgow.

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