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Expectations Traps and Monetary Policy with Limited Commitment

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  • Christoph Himmels

    (Department of Economics, University of Exeter)

  • Tatiana Kirsanova

    (Department of Economics, University of Exeter)

Abstract

We study the existence and uniqueness properties of monetary policy with limited commitment in LQ RE models. We use a New Keynesian model with debt accumulation in the spirit of Leeper (1991) as a `lab', because this model generates multiple equilibria under pure discretion, and under full commitment there are two distinct determinate regimes. We study how these properties change over the continuum of intermediate cases between commitment and discretion. We find that although multiple equilibria exist for high degrees of precommitment, even a small degree of precommitment selects a unique equilibrium for a wide range of parameters. We discuss the stability properties of policy equilibria which can be used to design an equilibrium selection criterion. We also demonstrate very different welfare implications for different policy equilibria.

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Bibliographic Info

Paper provided by Exeter University, Department of Economics in its series Discussion Papers with number 1102.

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Date of creation: 2011
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Handle: RePEc:exe:wpaper:1102

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Keywords: Limited Commitment; Commitment; Discretion; Multiple Equilibria;

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  1. Stefania Albanesi & V. V. Chari & Lawrence J. Christiano, 2002. "Expectation Traps and Monetary Policy," Macroeconomics 0201004, EconWPA.
  2. Andrew Blake & Tatiana Kirsanova, 2008. "Discretionary Policy and Multiple Equilibria in LQ RE Models," Discussion Papers 0813, Exeter University, Department of Economics.
  3. Schmitt-Grohé, Stephanie & Uribe, Martín, 2001. "Optimal Fiscal and Monetary Policy Under Sticky Prices," CEPR Discussion Papers 2942, C.E.P.R. Discussion Papers.
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  16. Dennis, Richard & Kirsanova, Tatiana, 2010. "Expectations Traps and Coordination Failures: Selecting among Multiple Discretionary Equilibria," MPRA Paper 24616, University Library of Munich, Germany.
  17. Andrea Tambalotti & Ernst Schaumburg, 2004. "An Investigation of the Gains from Commitment in Monetary Policy," Econometric Society 2004 North American Summer Meetings 282, Econometric Society.
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Cited by:
  1. Campbell Leith & Simon Wren-Lewis, 2012. "Fiscal Sustainability in a New Keynesian Model - Additional Appendix," Working Papers 2012_13, Business School - Economics, University of Glasgow.

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