Expectations Traps and Monetary Policy with Limited Commitment

Christoph Himmels and Tatiana Kirsanova
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Christoph Himmels: Department of Economics, University of Exeter

No 1102, Discussion Papers from University of Exeter, Department of Economics

Abstract: We study the existence and uniqueness properties of monetary policy with limited commitment in LQ RE models. We use a New Keynesian model with debt accumulation in the spirit of Leeper (1991) as a `lab', because this model generates multiple equilibria under pure discretion, and under full commitment there are two distinct determinate regimes. We study how these properties change over the continuum of intermediate cases between commitment and discretion. We find that although multiple equilibria exist for high degrees of precommitment, even a small degree of precommitment selects a unique equilibrium for a wide range of parameters. We discuss the stability properties of policy equilibria which can be used to design an equilibrium selection criterion. We also demonstrate very different welfare implications for different policy equilibria.

Keywords: Limited Commitment; Commitment; Discretion; Multiple Equilibria (search for similar items in EconPapers)
JEL-codes: C61 E31 E52 E58 E61 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Working Paper: Expectations Traps and Monetary Policy with Limited Commitment (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:exe:wpaper:1102

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