Dynamic commitment and imperfect policy rules
AbstractConsidering the dynamics of commitment highlights, some neglected features of time inconsistency problems. We modify the standard rules-versus-discretion question in three ways: (1) A government that does not commit today retains the option to do so tomorrow, (2) the government's commitment capability is restricted to a class of simple rules, and (3) the government's ability to make irrevocable commitments is restricted. Three results stand out. First, the option to wait makes the incumbent regime (rules or discretion) relatively more attractive. Second, the option to wait means that increased uncertainly 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 InfoPaper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1995-015.
Date of creation: 1998
Date of revision:
Publication status: Published in Journal of Money, Credit & Banking, Nov 2000 Pt 1, Vol. 32 Issue 4, pp. 766-784
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