Escaping expectation traps: How much commitment is required?

Christoph Himmels and Tatiana Kirsanova

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 3, 649-665

Abstract: 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 Debertoli 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: 2013
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Citations: View citations in EconPapers (6)

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Working Paper: Escaping Expectation Traps: How Much Commitment is Required? (2012)
Working Paper: Escaping Expectation Traps: How Much Commitment is Required? (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:37:y:2013:i:3:p:649-665

DOI: 10.1016/j.jedc.2012.10.009

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