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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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  12. Richard Dennis & Tatiana Kirsanova, 2010. "Expectations traps and coordination failures: selecting among multiple discretionary equilibria," Working Paper Series 2010-02, Federal Reserve Bank of San Francisco.
  13. Evans, George W. & Honkapohja, Seppo, 2001. "Expectations and the Stability Problem for Optimal Monetary Policies," CEPR Discussion Papers 2805, C.E.P.R. Discussion Papers.
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  26. Sleet, Christopher, 2001. "On Credible Monetary Policy and Private Government Information," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 338-376, July.
  27. Debortoli, Davide & Nunes, Ricardo, 2006. "On Linear Quadratic Approximations," MPRA Paper 544, University Library of Munich, Germany, revised Jul 2006.
  28. Henry W. Chappell & Thomas M. Havrilesky & Rob Roy McGregor, 1993. "Partisan Monetary Policies: Presidential Influence Through the Power of Appointment," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 185-218.
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