Abstract
Our objectives are: to quantify the stabilization welfare gains from commitment; to examine how commitment to an optimal rule can be sustained as an equilibrium; to find a simple interest rate rule that approximates the optimal commitment one. We utilize an empirical micro-founded euro-area DSGE model, a quadratic approximation of household utility as the welfare criterion, employing a nominal interest rate lower bound. In contrast to previous studies, we find significant commitment stabilization gains of around a 0.4–0.5% equivalent permanent consumption increase, and with higher price stickiness gains over 2%. We find that a simple optimized commitment rule responding to inflation and the real wage mimics the optimal one.
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