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Committing and reneging: A dynamic model of policy regimes

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  • Haubrich, Joseph G.
  • Ritter, Joseph A.

Abstract

Actual policy decisions are made in real time and are not irrevocable. These observations are mundane, but most policy modeling has neglected them. We show that when policy is made in an environment of uncertainty, costs of switching policies give the option to wait positive value. This insight has several implications: First, the option to wait itself makes the incumbent regime relatively more attractive (compared to the traditional once-and-for-all analysis). Second, the option to wait means that increased uncertainty makes the incumbent regime more attractive. Third, because the commitment decision takes place in real time, policy choice displays hysteresis.

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Bibliographic Info

Article provided by Elsevier in its journal International Review of Economics & Finance.

Volume (Year): 13 (2004)
Issue (Month): 1 ()
Pages: 1-18

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Handle: RePEc:eee:reveco:v:13:y:2004:i:1:p:1-18

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Web page: http://www.elsevier.com/locate/inca/620165

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References

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  1. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
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  13. Haubrich, Joseph G & Ritter, Joseph A, 2000. "Dynamic Commitment and Incomplete Policy Rules," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 766-84, November.
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Cited by:
  1. Li, Jingyuan & Liu, Yongming & Tian, Guoqiang, 2009. "A reputation strategic model of monetary policy in continuous-time," Journal of Macroeconomics, Elsevier, vol. 31(4), pages 523-533, December.
  2. Beat Spirig & Rolf Weder, 2008. "To Wait or Not to Wait: Swiss EU-Membership as an Investment under Uncertainty," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 144(I), pages 85-114, March.

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