Working Paper: CEPR ID: DP17120
Authors: Jean Barthélemy; Eric Mengus
Abstract: The commitment ability of governments is neither infinite nor zero but intermediate. In this paper, we determine the commitment ability that a government needs to implement a unique equilibrium outcome and rule out undesired self-fulfilling expectations. We first show that, in a large class of static macroeconomic games, the government can implement any time-consistent outcome with any low level of commitment ability. We then show that this result may not be robust to imperfect information, fixed costs or repeated interactions. We finally derive implications for models of bailouts, inflation bias, and capital taxation.
Keywords: implementation; limited commitment; policy rules
JEL Codes: C73; E58; E61; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low commitment ability (D29) | government can implement any time-consistent outcome (E61) |
| government's commitment ability > cost of controllability (H12) | government can credibly commit to a reaction function (E61) |
| government can rule out bailout expectations (G28) | low commitment ability (D29) |
| increased commitment ability (D91) | better equilibrium outcomes (D50) |