Expectations Traps and Monetary Policy with Limited Commitment

Christoph Himmels and Tatiana Kirsanova

MPRA Paper from University Library of Munich, Germany

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 E52 E58 E61 E63 (search for similar items in EconPapers)
Date: 2011-02-28
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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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:pra:mprapa:29208

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