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Working Paper

Dynamic Commitment and Imperfect Policy Rules

Examining the dynamics of commitment highlights some neglected features of time inconsistency. We modify the 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 some 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 discretion relatively more attractive. Second, the option to wait means that increased uncertainty makes discretion more attractive. Third, because the commitment decision takes place in "real time," policy choice displays hysteresis.

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Haubrich, Joseph G., and Joseph Ritter. 1996. “Dynamic Commitment and Imperfect Policy Rules.” Federal Reserve Bank of Cleveland, Working Paper No. 96-01.