LOOSE COMMITMENT IN MEDIUM-SCALE MACROECONOMIC MODELS: THEORY AND APPLICATIONS

Davide Debortoli, Junior Maih, Ricardo Nunes
2012 Macroeconomic Dynamics  
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 medium-and large-scale models typically used in monetary policy. We apply our method to the Smets and Wouters (2007) model, where we show that imperfect commitment has relevant implications for interest rate setting, the sources of business cycle fluctuations, and welfare.
doi:10.1017/s1365100512000326 fatcat:clfyocotizg3vna6oxcovgctl4