This paper proposes a method and a toolkit for solving optimal
policy with imperfect commitment. As opposed to the existing
literature, our method can be employed in medium- and large-scale
models typically used in monetary policy. We apply our method to
the Smets and Wouters (2007) model, where we show that imperfect
commitment has relevant implications for interest rate setting, the
sources of business cycle fluctuations, and welfare.
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