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.

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Renseignements sur la publication
Ministère/Organisme Bank of Canada.
Titre Limited commitment, endogenous credibility and the challenges of price-level targeting / by Gino Cateau and Malik Shukayev.
Titre de la série Bank of Canada staff working paper, 1701-9397 ; 2018-61
Type de publication Série - Voir l'enregistrement principal
Langue [Anglais]
Format Électronique
Document électronique
Note(s) "December 2018."
Includes bibliographic references.
Includes abstract in French.
Information sur la publication [Ottawa] : Bank of Canada, 2018.
Auteur / Contributeur Cateau, Gino.
Shukayev, Malik.
Description ii, 24 p.
Numéro de catalogue
  • FB3-5/2018-61E-PDF
Descripteurs Monetary policy
Central banks
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