Escaping Expectation Traps: How Much Commitment is Required?

Christoph Himmels and Tatiana Kirsanova

Working Papers from Business School - Economics, University of Glasgow

Abstract: In this paper we study the degree of precommitment that is required to eliminate multiplicity of policy equilibria, which arise if the policy maker acts under pure discretion. We apply a framework developed by Schaumburg and Tambalotti (2007) and Debortoli and Nunes (2010) to a standard New Keynesian model with government debt. We demonstrate the existence of expectation traps under limited commitment and identify the minimum degree of commitment which is needed to escape from these traps. We find that the degree of precommitment which is sufficient to generate uniqueness of the Pareto-preferred equilibrium requires the policy maker to stay in office for a period of two to five years. This is consistent with monetary policy arrangements in many developed countries.

Keywords: Limited Commitment; Commitment; Discretion; Multiple Equilibria; Monetary and Fiscal Policy Interactions (search for similar items in EconPapers)
JEL-codes: C61 E31 E52 E58 E61 (search for similar items in EconPapers)
Date: 2012-12
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.gla.ac.uk/media/media_259975_en.pdf (application/pdf)

Related works:
Journal Article: Escaping expectation traps: How much commitment is required? (2013)
Working Paper: Escaping Expectation Traps: How Much Commitment is Required? (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2012_18

Access Statistics for this paper

More papers in Working Papers from Business School - Economics, University of Glasgow Contact information at EDIRC.
Bibliographic data for series maintained by Business School Research Team ().