Committing and Reneging: A Dynamic Model of Policy Regimes

31 Pages Posted: 23 Jan 2002

See all articles by Joseph G. Haubrich

Joseph G. Haubrich

Federal Reserve Bank of Cleveland

Joseph A. Ritter

University of Minnesota - Twin Cities - Hubert H. Humphrey Institute of Public Affairs

Date Written: February 6, 2001

Abstract

Actual policy decisions are made in real time and are not irrevocable, but most policy modeling has neglected these mundane factors. In an environment of uncertainty, the ability to switch policies adds an option value to the choice problem. This "option to wait" makes the incumbent regime relatively more attractive (compared to the traditional once-and-for-all analysis), as does increased uncertainty, which increases the value of the option. Furthermore, because the commitment decision takes place in real time, policy choice displays hysteresis. This approach also extends some results in the real options literature.

Keywords: commitment, dynamic inconsistency, rules versus discretion

JEL Classification: L51, E52, F33, G13

Suggested Citation

Haubrich, Joseph G. and Ritter, Joseph A., Committing and Reneging: A Dynamic Model of Policy Regimes (February 6, 2001). Available at SSRN: https://ssrn.com/abstract=297420 or http://dx.doi.org/10.2139/ssrn.297420

Joseph G. Haubrich (Contact Author)

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States
216-579-2802 (Phone)
216-579-3050 (Fax)

Joseph A. Ritter

University of Minnesota - Twin Cities - Hubert H. Humphrey Institute of Public Affairs ( email )

301 19th Ave S
Minneapolis, MN 55455
United States

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