The Importance of Commitment in the New Keynesian Model

Jean-Paul Lam ()

No 1008, Working Papers from University of Waterloo, Department of Economics

Abstract: In the New Keynesian model, even if the central bank does not have an over-ambitious output target, policy under discretion leads to an inefficiency known as the stabilisation bias. In this paper, using a New Keynesian model, we explore and quantify how various uncertainties such as an information lag, a cost channel and multi-period data revisions affect the size of the stabilisation bias. When an information lag is introduced in an otherwise standard New Keynesian model, we find that the size of the stabilisation bias is considerably reduced. The presence of a cost-channel in the model, on the other hand, increases the stabilisation bias significantly. Finally, multi-period revisions to output and inflation, reduces the inefficiency associated with discretionary policy.

JEL-codes: E52 E58 E61 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mac
Date: 2010-07, Revised 2010-07
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Journal Article: The Importance of Commitment in the New Keynesian Model (2010)
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Persistent link: http://EconPapers.repec.org/RePEc:wat:wpaper:1008

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