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Loose commitment

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  • Davide Debortoli
  • Ricardo Nunes

Abstract

Due to time-inconsistency or policymakers' turnover, economic promises are not always fulfilled and plans are revised periodically. This fact is not accounted for in the commitment or the discretion approach. We consider two settings where the planner occasionally defaults on past promises. In the first setting, a default may occur in any period with a given probability. In the second, we make the likelihood of default a function of endogenous variables. We formulate these problems recursively, and provide techniques that can be applied to a general class of models. Our method can be used to analyze the plausibility and the importance of commitment and characterize optimal policy in a more realistic environment. We illustrate the method and results in a fiscal policy application.

Suggested Citation

  • Davide Debortoli & Ricardo Nunes, 2007. "Loose commitment," International Finance Discussion Papers 916, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:916
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    References listed on IDEAS

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    Cited by:

    1. Albert Marcet & Ramon Marimon, 2019. "Recursive Contracts," Econometrica, Econometric Society, vol. 87(5), pages 1589-1631, September.
    2. Vasilev, Aleksandar, 2013. "Fiscal policy in a Real-Business-Cycle model with labor-intensive government services and endogenous public sector wages and hours," EconStor Preprints 142338, ZBW - Leibniz Information Centre for Economics.
    3. Ricardo Nunes & Jinill Kim & Jesper Linde & Davide Debortoli, 2014. "Designing a Simple Loss Function for the Fed: Does the Dual Mandate Make Sense?," 2014 Meeting Papers 1043, Society for Economic Dynamics.
    4. Ruediger Bachmann & Jinhui Bai, 2013. "Politico-Economic Inequality and the Comovement of Government Purchases," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(4), pages 565-580, October.
    5. Alex Haberis & Richard Harrison & Matt Waldron, 2014. "Transitory interest-rate pegs under imperfect credibility," Discussion Papers 1422, Centre for Macroeconomics (CFM).
    6. Eric T. Swanson & John C. Williams, 2014. "Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates," American Economic Review, American Economic Association, vol. 104(10), pages 3154-3185, October.
    7. Richard Dennis, 2008. "Timeless perspective policymaking: When is discretion superior?," Working Paper Series 2008-21, Federal Reserve Bank of San Francisco.
    8. Debortoli, Davide & Maih, Junior & Nunes, Ricardo, 2014. "Loose Commitment In Medium-Scale Macroeconomic Models: Theory And Applications," Macroeconomic Dynamics, Cambridge University Press, vol. 18(1), pages 175-198, January.
    9. Marina Azzimonti, 2015. "The dynamics of public investment under persistent electoral advantage," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 653-678, July.
    10. Francesco Furlanetto & Paolo Gelain & Marzie Taheri Sanjani, 2014. "Output Gap in Presence of Financial Frictions and Monetary Policy Trade-offs," IMF Working Papers 2014/128, International Monetary Fund.
    11. Anderson, Gary S. & Kim, Jinill & Yun, Tack, 2010. "Using a projection method to analyze inflation bias in a micro-founded model," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1572-1581, September.
    12. Dennis, Richard, 2014. "Imperfect credibility and robust monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 44(C), pages 218-234.
    13. Ricardo Nunes & Davide Debortoli, 2007. "Political Disagreement, Lack of Commitment and the Level of Debt," 2007 Meeting Papers 725, Society for Economic Dynamics.
    14. Givens, Gregory E., 2016. "On the gains from monetary policy commitment under deep habits," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 19-36.
    15. Hassler, John & Krusell, Per & Storesletten, Kjetil & Zilibotti, Fabrizio, 2008. "On the optimal timing of capital taxes," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 692-709, May.
    16. Bursian Dirk & Roth Markus, 2014. "Optimal policy and Taylor rule cross-checking under parameter uncertainty," The B.E. Journal of Macroeconomics, De Gruyter, vol. 14(1), pages 1-24, January.
    17. Nunes, Ricardo, 2008. "Delegation and Loose Commitment," MPRA Paper 11555, University Library of Munich, Germany.
    18. Pedro Gomes & Davide Debortoli, 2012. "Labor and Profit Taxation, and the Supply of Public Capital," 2012 Meeting Papers 325, Society for Economic Dynamics.
    19. J. Scott Davis & Ippei Fujiwara, 2015. "Pegging the exchange rate to gain monetary policy credibility," Globalization Institute Working Papers 224, Federal Reserve Bank of Dallas.
    20. Vasilev, Aleksandar, 2013. "Essays on Real Business Cycle Modeling and the Public Sector," EconStor Theses, ZBW - Leibniz Information Centre for Economics, number 130522, July.

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    Econometric models; Fiscal policy;

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