The Importance of Commitment in the New Keynesian Model

Jean-Paul Lam

The B.E. Journal of Macroeconomics, 2010, vol. 10, issue 1, 23

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 stabilization bias. In this paper, using a New Keynesian model, we explore and quantify how a cost channel and multi-period data revisions affect the size of the stabilization bias. We find that the presence of a cost channel in the model increases the stabilization bias significantly. On the other hand, multi-period revisions to output and inflation reduce the inefficiency associated with discretionary policy.

Keywords: stabilization bias; discretion; commitment; cost-channel; information lags; data revisions (search for similar items in EconPapers)
Date: 2010
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DOI: 10.2202/1935-1690.2088

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