Loose Commitment in Medium-Scale Macroeconomic Models: Theory and an Application

Davide Debortoli, Junior Maih, Ricardo Cavaco Nunes
2010 Social Science Research Network  
This paper proposes a method and a toolkit for solving optimal policy with imperfect commitment. As opposed to the existing literature, our method can be employed in the medium-and large-scale models typically used in monetary policy. We apply our method to the Smets and Wouters model [American Economic Review 97(3), 586-606 (2007) ], for which we show that imperfect commitment has relevant implications for interest rate setting, the sources of business cycle fluctuations, and welfare.
doi:10.2139/ssrn.1735395 fatcat:gssqltuxabgyplk6lignztvtky