On the gains from monetary policy commitment under deep habits

Gregory Givens

Journal of Macroeconomics, 2016, vol. 50, issue C, 19-36

Abstract: I study the welfare gains from commitment relative to discretion in the context of an equilibrium model that features deep habits in consumption. Policy simulations reveal that the welfare gains are increasing in the degree of habit formation and economically significant for a range of values consistent with U.S. data. I trace these results to the supply-side effects that deep habits impart on the economy and show that they ultimately weaken the stabilization trade-offs facing a discretionary planner. Most of the inefficiencies from discretion, it turns out, can be avoided by installing commitment regimes that last just two years or less. Extending the commitment horizon further delivers marginal welfare gains that are trivial by comparison.

Keywords: Deep habits; Optimal monetary policy; Commitment; Discretion (search for similar items in EconPapers)
JEL-codes: E52 E61 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0164070416300477
Full text for ScienceDirect subscribers only

Related works:
Working Paper: On the Gains from Monetary Policy Commitment under Deep Habits (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:50:y:2016:i:c:p:19-36

DOI: 10.1016/j.jmacro.2016.08.006

Access Statistics for this article

Journal of Macroeconomics is currently edited by Douglas McMillin and Theodore Palivos

More articles in Journal of Macroeconomics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().