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How Important Is Precommitment for Monetary Policy?

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Author Info
Dennis, Richard
Soderstrom, Ulf

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Abstract

We quantify the welfare differential between precommitment and discretionary monetary policy in three estimated models of the U.S. economy by calculating the permanent deviation of inflation from target that in welfare terms is equivalent to moving from discretion to precommitment. Using a range of reasonable central bank preference parameters, this "inflation equivalent" ranges from 0.05 to 3.6 percentage points, with a mid-point of either 0.15 or 1-1.5 percentage points, depending on the model. In addition to the degree of forward-looking behavior, we show that the existence of transmission lags and/or information lags is crucial for determining the welfare gain from precommitment.

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File URL: http://dx.doi.org/10.1353/mcb.2006.0054
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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 38 (2006)
Issue (Month): 4 (June)
Pages: 847-872
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Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:4:p:847-872

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