IDEAS home Printed from
   My bibliography  Save this paper

Welfare Gains from Monetary Commitment in a Model of the Euro-Area


  • Paul Levine

    () (University of Surrey)

  • Peter McAdam

    (European Central Bank)

  • Joseph Pearlman

    (London Metropolitan University)


This paper sets out first, to quantify the stabilization gains from commitment in terms of household welfare and second, to examine how commitment to an optimal or approximately optimal rule can be sustained as an equilibrium in which reneging hardly ever occurs. We utilize an influential empirical micro-founded DSGE model, the Euro-Area model of \cite{SW03}, and a quadratic approximation of the epresentative household's utility as the welfare criterion. We impose the effect of a lower zero nominal interest rate bound. In contrast with previous studies we find substantial stabilization gains from commitment -- as much as a $5-6\%$ permanent increase in consumption. We also find that a simple optimized commitment rule with the nominal interest rate responding to current inflation and the real wage closely mimics the optimal rule

Suggested Citation

  • Paul Levine & Peter McAdam & Joseph Pearlman, 2006. "Welfare Gains from Monetary Commitment in a Model of the Euro-Area," Computing in Economics and Finance 2006 403, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:403

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    More about this item


    Monetary rules; commitment; discretion; welfare gains;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sce:scecfa:403. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.