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The gains from short-term commitments

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  • Jensen, Christian

Abstract

In a standard New-Keynesian sticky-price model, we study how the gains from commitment depend on how far ahead policymakers commit. While the traditional time-inconsistent solution assumes a once-and-for-all commitment to a plan for all future periods, we show that most of the gains can be achieved with commitment streaks lasting 3–4 periods, or 9–12 months. Moreover, we find that continuously committing just one period ahead is sufficient to capture all the gains from commitment, though this is only feasible with inflation-targeting. The adaptability of short-term commitments to changes in our models and understanding of the economy should arguably make these more credible than once-and-for-all commitments.

Suggested Citation

  • Jensen, Christian, 2013. "The gains from short-term commitments," Journal of Macroeconomics, Elsevier, vol. 35(C), pages 14-23.
  • Handle: RePEc:eee:jmacro:v:35:y:2013:i:c:p:14-23
    DOI: 10.1016/j.jmacro.2012.10.006
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    10. Ramon Marimon, 2011. "New Results in Recursive Contract Theory," 2011 Meeting Papers 752, Society for Economic Dynamics.
    11. Rogoff, Kenneth, 1987. "Reputational constraints on monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 26(1), pages 141-181, January.
    12. Currie,David & Levine,Paul, 2009. "Rules, Reputation and Macroeconomic Policy Coordination," Cambridge Books, Cambridge University Press, number 9780521104609, October.
    13. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
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    Cited by:

    1. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    2. Givens, Gregory E., 2016. "On the gains from monetary policy commitment under deep habits," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 19-36.

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    More about this item

    Keywords

    Time-inconsistency; Commitment streaks; Implementation delays;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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