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Committing and reneging: A dynamic model of policy regimes

  • Haubrich, Joseph G.
  • Ritter, Joseph A.

Actual policy decisions are made in real time and are not irrevocable. These observations are mundane, but most policy modeling has neglected them. We show that when policy is made in an environment of uncertainty, costs of switching policies give the option to wait positive value. This insight has several implications: First, the option to wait itself makes the incumbent regime relatively more attractive (compared to the traditional once-and-for-all analysis). Second, the option to wait means that increased uncertainty makes the incumbent regime more attractive. Third, because the commitment decision takes place in real time, policy choice displays hysteresis.

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Article provided by Elsevier in its journal International Review of Economics & Finance.

Volume (Year): 13 (2004)
Issue (Month): 1 ()
Pages: 1-18

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Handle: RePEc:eee:reveco:v:13:y:2004:i:1:p:1-18
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620165

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  1. Haubrich, Joseph G & Ritter, Joseph A, 2000. "Dynamic Commitment and Incomplete Policy Rules," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 766-84, November.
  2. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, volume 1, number 5474.
  3. Gerardo della Paolera & Alan M. Taylor, 2000. "Economic Recovery from the Argentine Great Depression: Institutions, Expectations, and the Change of Macroeconomic Regime," NBER Working Papers 6767, National Bureau of Economic Research, Inc.
  4. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March.
  5. Arrow, Kenneth J & Fisher, Anthony C, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 312-19, May.
  6. George J. Mailath & Loretta J. Mester, 1993. "A positive analysis of bank closure," Working Papers 93-10/R, Federal Reserve Bank of Philadelphia.
  7. Dixit, A., 1988. "Entry And Exit Decisions Under Uncertainty," Papers 91, Princeton, Department of Economics - Financial Research Center.
  8. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
  9. Robert P. Flood & Peter Isard, 1989. "Monetary Policy Strategies," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 612-632, September.
  10. 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.
  11. Amitrajeet A. Batabyal, 1996. "The Timing of Land Development: An Invariance Result," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(4), pages 1092-1097.
  12. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  13. Flood, Robert P & Garber, Peter M, 1984. "Gold Monetization and Gold Discipline," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 90-107, February.
  14. Carlos E. Zarazaga, 1995. "Argentina, Mexico, and currency boards: another case of rules versus discretion," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q IV, pages 14-24.
  15. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, June.
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  17. Lambson, Val Eugene, 1992. "Competitive Profits in the Long Run," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 125-42, January.
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