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Working Paper 1999-020A

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"Committing and Reneging: A Dynamic Model of Policy Regimes"
by Joseph G. Haubrich, and Joseph Ritter

Actual policy decisions are made in real time and are not irrevocable. These observations are mundane, but most policy modeling has neglected them. We show that when policy is made in an environment of uncertainty, costs of switching policies give the option to wait positive value. This insight has several implications: First, the option to wait itself makes the incumbent regime relatively more attractive (compared to the traditional once-and-for-all analysis). Second, the option to wait means that increased uncertainty makes the incumbent regime more attractive. Third, because the commitment decision takes place in real time, policy choice displays hysteresis.

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Category > Monetary Policy/Macroeconomics