International Finance Discussion Papers (IFDP)
November 2011
Loose Commitment in Medium-Scale Macroeconomic Models: Theory and Applications
Davide Debortoli, Junior Maih, and Ricardo Nunes
Abstract:
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.
Full paper (screen reader version)Keywords: Commitment, discretion, monetary policy
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Last Update:
July 10, 2020