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

Dieses Objekt wird bereitgestellt von:
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. Bei Fragen zum Objekt wenden Sie sich bitte an den Datenpartner.

Objekttyp

  • Arbeitspapier

Beteiligte

  • Levine, Paul
  • McAdam, Peter
  • Pearlman, Joseph G.
  • European Central Bank (ECB)

Entstanden

  • 2007

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