Limited commitment, endogenous credibility and the challenges of price-level targeting / by Gino Cateau and Malik Shukayev.: FB3-5/2018-61E-PDF
"This paper studies the cost of limited commitment when a central bank has the discretion to adjust policy whenever the costs of honoring its past commitments become high. Specifically, we consider a central bank that seeks to implement optimal policy in a New Keynesian model by committing to a price-level target path. However, the central bank retains the flexibility to reset the target path if the cost of adhering to it exceeds a social tolerance threshold. We find that endowing the central bank with such discretion undermines the credibility of the price-level target and weakens its effectiveness to stabilize the economy through expectations. The endogenous nature of credibility also brings novel results relative to models with exogenous timing of target resets. A much higher degree of credibility is needed to realize the stabilization benefits of commitment. Multiple equilibria also emerge, including a low credibility equilibrium with frequent target resets and high volatility"--Abstract.
Permanent link to this Catalogue record:
publications.gc.ca/pub?id=9.867625&sl=0
| Department/Agency | Bank of Canada. |
|---|---|
| Title | Limited commitment, endogenous credibility and the challenges of price-level targeting / by Gino Cateau and Malik Shukayev. |
| Series title | Bank of Canada staff working paper, 1701-9397 ; 2018-61 |
| Publication type | Series - View Master Record |
| Language | [English] |
| Format | Electronic |
| Electronic document | |
| Note(s) | "December 2018." Includes bibliographic references. Includes abstract in French. |
| Publishing information | [Ottawa] : Bank of Canada, 2018. |
| Author / Contributor | Cateau, Gino. Shukayev, Malik. |
| Description | ii, 24 p. |
| Catalogue number |
|
| Subject terms | Monetary policy Central banks |