The gains from delegation revisited: price-level targeting, speed-limit and interest rate smoothing policies

In the standard monetary policy model, the monetary authorities face a commitment problem that has been termed the 'stabilisation bias'. When a shock hits that threatens to push up inflation, the policymaker would like to generate the expectation that inflation will be low in the future, because this will help anchor inflation today, and in so doing allow it to tighten policy by less, which itself is beneficial. A policymaker that can commit (that is, is forced by some means not to reconsider its plans when the threat to inflation abates), can achieve inflation control at the expense of much less variability in the real economy.