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The B.E. Journal of Macroeconomics

Editor-in-Chief: Abraham, Arpad / Cavalcanti, Tiago

Ed. by Carceles-Poveda , Eva / Kambourov, Gueorgui / Lambertini, Luisa / Ruhl, Kim

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The Importance of Commitment in the New Keynesian Model

Jean-Paul Lam1

1University of Waterloo,

Citation Information: The B.E. Journal of Macroeconomics. Volume 10, Issue 1, ISSN (Online) 1935-1690, DOI: 10.2202/1935-1690.2088, November 2010

Publication History

Published Online:
2010-11-16

In the New Keynesian model, even if the central bank does not have an over-ambitious output target, policy under discretion leads to an inefficiency known as the stabilization bias. In this paper, using a New Keynesian model, we explore and quantify how a cost channel and multi-period data revisions affect the size of the stabilization bias. We find that the presence of a cost channel in the model increases the stabilization bias significantly. On the other hand, multi-period revisions to output and inflation reduce the inefficiency associated with discretionary policy.

Keywords: stabilization bias; discretion; commitment; cost-channel; information lags; data revisions

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