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Loose commitment in medium-scale macroeconomic models: theory and applications

Listed author(s):
  • Davide Debortoli
  • Junior Maih
  • Ricardo Nunes

This paper proposes a method and a toolkit for solving optimal policy with imperfect commitment. 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 interest rate setting, the sources of business cycle fluctuations, and welfare.

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File URL: http://www.federalreserve.gov/pubs/ifdp/2011/1034/default.htm
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File URL: http://www.federalreserve.gov/pubs/ifdp/2011/1034/ifdp1034.pdf
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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 1034.

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Date of creation: 2011
Handle: RePEc:fip:fedgif:1034
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  8. 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.
  9. Smets, Frank & Wouters, Raf, 2007. "Shocks and frictions in US business cycles: a Bayesian DSGE approach," Working Paper Series 0722, European Central Bank.
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  22. Sleet, Christopher, 2001. "On Credible Monetary Policy and Private Government Information," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 338-376, July.
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  25. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
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