Quantifying and sustaining welfare gains from monetary commitment

Paul Levine (), Peter McAdam () and Joseph Pearlman

Journal of Monetary Economics, 2008, vol. 55, issue 7, 1253-1276

Abstract: Our objectives are: to quantify the stabilization welfare gains from commitment; to examine how commitment to an optimal rule can be sustained as an equilibrium; to find a simple interest rate rule that approximates the optimal commitment one. We utilize an empirical micro-founded euro-area DSGE model, a quadratic approximation of household utility as the welfare criterion, employing a nominal interest rate lower bound. In contrast to previous studies, we find significant commitment stabilization gains of around a 0.4-0.5% equivalent permanent consumption increase, and with higher price stickiness gains over 2%. We find that a simple optimized commitment rule responding to inflation and the real wage mimics the optimal one.

Keywords: Monetary; rules; Commitment; Discretion; Welfare; gains (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (80)

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Working Paper: Quantifying and sustaining welfare gains from monetary commitment (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:55:y:2008:i:7:p:1253-1276

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