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On the Gains from Monetary Policy Commitment under Deep Habits

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  • Givens, Gregory

Abstract

I study the welfare gains from commitment relative to discretion in the context of an equilibrium model that features deep habits in consumption. Policy simulations reveal that the welfare gains are increasing in the degree of habit formation and economically significant for a range of values consistent with U.S. data. I trace these results to the supply-side effects that deep habits impart on the economy and show that they ultimately weaken the stabilization trade-offs facing a discretionary planner. Most of the inefficiencies from discretion, it turns out, can be avoided by installing commitment regimes that last just two years or less. Extending the commitment horizon further delivers marginal welfare gains that are trivial by comparison.

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  • Givens, Gregory, 2015. "On the Gains from Monetary Policy Commitment under Deep Habits," MPRA Paper 67996, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:67996
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    References listed on IDEAS

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    Keywords

    Deep Habits; Optimal Monetary Policy; Commitment; Discretion;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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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