Optimal policy with limited commitment
This paper uses Whiteman's(1986) frequency-domain optimization methodology to parameterize the precommitment period in a standard rational expectations policy design model. This allows researchers to adopt an empirical approach to the time consistency issue. That is, the operative commitment horizon in a given policy setting can be estimated along with the other parameters characterizing the preferences and constraints of the agents in the model. It is shown that the commitment horizon can be estimated by running (restricted) regressions of the policymaker's instrument variable on past values of its target variable. ; Parameterizing the commitment horizon also delivers a mapping between welfare (or the value of the policymaker's objective function) and the length of the commitment horizon. The paper shows that the rate of convergence to the perfect precommitment value can be either quite slow or quite rapid, suggesting that the severity of the time consistency constraint can be sensitive to variation in the assumed commitment horizon. ; Finally, the results are applied to U.S. and German monetary policy during the post-Bretton Woods era. Assuming the monetary authority attempts to stabilize inflation using a Federal Funds like interest rate as an instrument, the results point to a one-month ahead commitment horizon for the U.S. Federal Reserve, and to a twelve-month ahead commitment horizon for the German Bundesbank. However, these horizons are estimated very imprecisely.
(This abstract was borrowed from another version of this item.)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, vol. 46(6), pages 1411-28, November.
- Lars Peter Hansen & Thomas J. Sargent, 1979.
"Formulating and estimating dynamic linear rational expectations models,"
127, Federal Reserve Bank of Minneapolis.
- Hansen, Lars Peter & Sargent, Thomas J., 1980. "Formulating and estimating dynamic linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 7-46, May.
- Sargent, Thomas J, 1984. "Autoregressions, Expectations, and Advice," American Economic Review, American Economic Association, vol. 74(2), pages 408-15, May.
- Roberds, William, 1987.
"Models of Policy under Stochastic Replanning,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 731-55, October.
- Abreu, Dilip & Pearce, David & Stacchetti, Ennio, 1986. "Optimal cartel equilibria with imperfect monitoring," Journal of Economic Theory, Elsevier, vol. 39(1), pages 251-269, June.
- Reinganum, Jennifer F & Stokey, Nancy L, 1985. "Oligopoly Extraction of a Common Property Natural Resource: The Importance of the Period of Commitment in Dynamic Games," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(1), pages 161-73, February.
- Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
- Robert E. Lucas Jr. & Nancy L. Stokey, 1982.
"Optimal Fiscal and Monetary Policy in an Economy Without Capital,"
532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
- Christiano, Lawrence J., 1985.
"A method for estimating the timing interval in a linear econometric model, with an application to Taylor's model of staggered contracts,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 9(4), pages 363-404, December.
- Lawrence J. Christiano, 1985. "A method for estimating the timing interval in a linear econometric model, with an application to Taylor's model of staggered contracts," Staff Report 101, Federal Reserve Bank of Minneapolis.
- Whiteman, Charles H, 1986. "An Analytical Policy Design under Rational Expectations," Econometrica, Econometric Society, vol. 54(6), pages 1387-1405, November.
- Roberto Chang, 1996. "Credible monetary policy with long-lived agents: recursive approaches," FRB Atlanta Working Paper 96-20, Federal Reserve Bank of Atlanta.
- Taub, Bart, 1986. "Asymptotic Properties of Pipeline Control of the Money Supply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(3), pages 647-65, October.
When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:22:y:1998:i:6:p:887-910. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.