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

Author

Listed:
  • Davide Debortoli

    () (UC San Diego)

  • Junior Maih

    () (Norges Bank (Central Bank of Norway))

  • Ricardo Nunes

    () (Federal Reserve Board)

Abstract

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.

Suggested Citation

  • Davide Debortoli & Junior Maih & Ricardo Nunes, 2010. "Loose commitment in medium-scale macroeconomic models: Theory and an application," Working Paper 2010/25, Norges Bank.
  • Handle: RePEc:bno:worpap:2010_25
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    File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2010/WP-201025/
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Commitment; Discretion; Linear-Quadratic;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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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