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Federal Reserve Bank of St. Louis
Working Papers
Dynamic commitment and imperfect policy rules
Joseph G. Haubrich
Joseph A. Ritter
Abstract

Considering the dynamics of commitment highlights, some neglected features of time inconsistency problems. We modify the standard rules-versus-discretion question in three ways: (1) A government that does not commit today retains the option to do so tomorrow, (2) the government's commitment capability is restricted to a class of simple rules, and (3) the government's ability to make irrevocable commitments is restricted. Three results stand out. First, the option to wait makes the incumbent regime (rules or discretion) relatively more attractive. Second, the option to wait means that increased uncertainly makes the incumbent regime more attractive. Third, because the commitment decision takes place in 'real time,' policy choice displays hysteresis.


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Joseph G. Haubrich & Joseph A. Ritter, Dynamic commitment and imperfect policy rules, Federal Reserve Bank of St. Louis, Working Papers 1995-015, 1998.
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Keywords: Monetary policy
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