Working Paper

Equilibrium and government commitment

Abstract: How should a government use the power to commit to ensure a desirable equilibrium outcome? In this paper, I show a misleading aspect of what has become a standard approach to this question, and I propose an alternative. I show that the complete description of an optimal (indeed, of any) policy scheme requires outlining the consequences of paths that are often neglected. The specification of policy along those paths is crucial in determining which schemes implement a unique equilibrium and which ones leave room for multiple equilibria that depend on the expectations of the private sector.

Keywords: Equilibrium (Economics);

Status: Published in Published In: Journal of Economic Theory> (Vol. 124, No. 1, September 2005, pp. 79-105)

Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Working Papers

Publication Date: 2002

Number: 624