Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/60528
Authors: 
Schaumburg, Ernst
Tambalotti, Andrea
Year of Publication: 
2003
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 171
Abstract: 
This paper proposes a simple framework for analyzing a continuum of monetary policy rules characterized by differing degrees of credibility, in which commitment and discretion become special cases of what we call quasi commitment. The monetary policy authority is assumed to formulate optimal commitment plans, to be tempted to renege on them, and to succumb to this temptation with a constant exogenous probability known to the private sector. By interpreting this probability as a continuous measure of the (lack of) credibility of the monetary policy authority, we investigate the welfare effect of a marginal increase in credibility. Our main finding is that, in a simple model of the monetary transmission mechanism, most of the gains from commitment accrue at relatively low levels of credibility.
JEL: 
E52
E58
E61
Document Type: 
Working Paper

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