Quantifying and sustaining welfare gains from monetary commitment

Peter McAdam (), Paul Levine () and Joseph Pearlman

No 709, Working Paper Series from European Central Bank

Abstract: The objectives of this paper are: first, to quantify the stabilization welfare gains from commitment; second, to examine how commitment to an optimal rule can be sustained as an equilibrium and third, to find a simple interest rate rule that closely approximates the optimal commitment one. We utilize an influential empirical micro-founded DSGE model, the euro area model of Smets and Wouters (2003), and a quadratic approximation of the representative household's utility as the welfare criterion. Importantly, we impose the effect of a nominal interest rate zero lower bound. In contrast with previous studies, we find significant stabilization gains from commitment: our central estimate is a 0.4 JEL Classification: E52, E37, E58

Keywords: commitment; discretion; Monetary rules; welfare gains. (search for similar items in EconPapers)
Date: 2007-01
Note: 50336
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2007709

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