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Equilibrium and Government Commitment

Working Paper 624 | Published September 1, 2002

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Marco Bassetto Monetary Advisor
Equilibrium and Government Commitment


How should a government use the power to commit to ensure a desirable equilibrium outcome? In this paper, I show a misleading aspect of what has become a standard approach to this question, and I propose an alternative. I show that the complete description of an optimal (indeed, of any) policy scheme requires outlining the consequences of paths that are often neglected. The specification of policy along those paths is crucial in determining which schemes implement a unique equilibrium and which ones leave room for multiple equilibria that depend on the expectations of the private sector.

Published in _Journal of Economic Theory_ (Vol. 124, No. 1, September 2005, pp. 79-105),