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How Important Is Precommitment for Monetary Policy?

  • Dennis, Richard
  • Soderstrom, Ulf

We quantify the welfare differential between precommitment and discretionary monetary policy in three estimated models of the U.S. economy by calculating the permanent deviation of inflation from target that in welfare terms is equivalent to moving from discretion to precommitment. Using a range of reasonable central bank preference parameters, this "inflation equivalent" ranges from 0.05 to 3.6 percentage points, with a mid-point of either 0.15 or 1-1.5 percentage points, depending on the model. In addition to the degree of forward-looking behavior, we show that the existence of transmission lags and/or information lags is crucial for determining the welfare gain from precommitment.

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File URL: http://dx.doi.org/10.1353/mcb.2006.0054
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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 38 (2006)
Issue (Month): 4 (June)
Pages: 847-872

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Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:4:p:847-872
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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