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Loose commitment in medium-scale macroeconomic models: Theory and an application

  • Davide Debortoli

    ()

    (UC San Diego)

  • Junior Maih

    ()

    (Norges Bank (Central Bank of Norway))

  • Ricardo Nunes

    ()

    (Federal Reserve Board)

This paper proposes a method and a toolkit for solving optimal policy with imperfect commitment in linear quadratic models. As opposed to the existing literature, our method can be employed in medium- and large-scale models typically used in monetary policy. We apply our method to the Smets and Wouters (2007) model, where we show that imperfect commitment has relevant implications for the interest rate setting, the sources of business cycle fluctuations, and welfare.

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File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2010/WP-201025/
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Paper provided by Norges Bank in its series Working Paper with number 2010/25.

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Length: 26 pages
Date of creation: 06 Dec 2010
Date of revision:
Handle: RePEc:bno:worpap:2010_25
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