An investigation of the gains from commitment in monetary policy

Ernst Schaumburg and Andrea Tambalotti ()

No 171, Staff Reports from Federal Reserve Bank of New York

Abstract: This paper proposes a simple framework for analyzing a continuum of monetary policy rules characterized by differing degrees of credibility, in which commitment and discretion become special cases of what we call quasi commitment. The monetary policy authority is assumed to formulate optimal commitment plans, to be tempted to renege on them, and to succumb to this temptation with a constant exogenous probability known to the private sector. By interpreting this probability as a continuous measure of the (lack of) credibility of the monetary policy authority, we investigate the welfare effect of a marginal increase in credibility. Our main finding is that, in a simple model of the monetary transmission mechanism, most of the gains from commitment accrue at relatively low levels of credibility.

Keywords: Monetary policy; Banks and banking, Central (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2003
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Related works:
Working Paper: An Investigation of the Gains from Commitment in Monetary Policy (2003)
Working Paper: An Investigation of the Gains from Commitment in Monetary Policy (2004)
Journal Article: An investigation of the gains from commitment in monetary policy (2007)
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