Arbeitspapier
Quantifying and sustaining welfare gains from monetary commitment
The objectives of this paper are: first, to quantify the stabilization welfare gains from commitment; second, to examine how commitment to an optimal rule can be sustained as an equilibrium and third, to find a simple interest rate rule that closely approximates the optimal commitment one. We utilize an influential empirical micro-founded DSGE model, the euro area model of Smets and Wouters (2003), and a quadratic approximation of the representative household’s utility as the welfare criterion. Importantly, we impose the effect of a nominal interest rate zero lower bound. In contrast with previous studies, we find significant stabilization gains from commitment: our central estimate is a 0.4 - 0.5% equivalent permanent increase in consumption, but in a variant with a higher degree of price stickiness, gains of over 2% are found. We also find that a simple optimized commitment rule with the nominal interest rate responding to current inflation and the real wage closely mimics the optimal rule.
- Sprache
-
Englisch
- Erschienen in
-
Series: ECB Working Paper ; No. 709
- Klassifikation
-
Wirtschaft
Monetary Policy
Prices, Business Fluctuations, and Cycles: Forecasting and Simulation: Models and Applications
Central Banks and Their Policies
- Thema
-
commitment
discretion
Monetary rules
welfare gains
Geldpolitik
Wohlfahrtsanalyse
Theorie
- Ereignis
-
Geistige Schöpfung
- (wer)
-
Levine, Paul
McAdam, Peter
Pearlman, Joseph G.
- Ereignis
-
Veröffentlichung
- (wer)
-
European Central Bank (ECB)
- (wo)
-
Frankfurt a. M.
- (wann)
-
2007
- Handle
- Letzte Aktualisierung
-
10.03.2025, 11:44 MEZ
Datenpartner
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Objekttyp
- Arbeitspapier
Beteiligte
- Levine, Paul
- McAdam, Peter
- Pearlman, Joseph G.
- European Central Bank (ECB)
Entstanden
- 2007