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Expectations Traps And Monetary Policy With Limited Commitment

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Executive Summary

In this paper the authors study the existence and uniqueness properties of monetary policy with limited commitment in LQ RE models. They use a New Keynesian model with debt accumulation in the spirit of Leeper (1991) as a 'Lab', because this model generates multiple equilibria under pure discretion, and under full commitment there are two distinct determinate regimes. They study how these properties change over the continuum of intermediate cases between commitment and discretion. They find that although multiple equilibria exist for high degrees of precommitment, even a small degree of precommitment selects a unique equilibrium for a wide range of parameters.

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