How important is precommitment for monetary policy?

Dennis, R. and Soderstrom, U. (2006) How important is precommitment for monetary policy? Journal of Money, Credit and Banking, 38(4), pp. 847-872. (doi: 10.1353/mcb.2006.0054)

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We quantify the welfare differential between precommitment and discretionary monetary policy in three estimated models of the U.S. economy by calculating the permanent deviation of inflation from target that in welfare terms is equivalent to moving from discretion to precommitment. Using a range of reasonable central bank preference parameters, this "inflation equivalent" ranges from 0.05 to 3.6 percentage points, with a mid-point of either 0.15 or 1-1.5 percentage points, depending on the model. In addition to the degree of forward-looking behavior, we show that the existence of transmission lags and/or information lags is crucial for determining the welfare gain from precommitment.

Item Type:Articles
Glasgow Author(s) Enlighten ID:Dennis, Professor Richard
Authors: Dennis, R., and Soderstrom, U.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Journal of Money, Credit and Banking
ISSN (Online):1538-4616

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