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I consider the desirability of the observed tendency of central banks to adjust interest rates only gradually in response to changes in economic conditions. I show, in the context of a simple model of optimizing private sector behaviour, that such inertial behaviour on the part of the central bank may indeed be optimal, in the sense of minimizing a loss function that penalizes inflation variations, deviations of output from potential and interest rate variability. Sluggish adjustment characterizes an optimal policy commitment, even though no such inertia would be present in the case of discretionary optimization.

Abstract. When presented with competing options, critical incident decision makers often struggle to commit to a choice (in particular when all options appear to yield negative consequences). Despite being motivated to take action in disasters, terrorism, major investigations, and complex political interventions, decision makers can become inert, looping between phases of situation assessment, option generation, and option evaluation. This "looping" is functionally redundant when it persists until they have lost the opportunity to take action. We define this as "decision inertia": the result of a process of (redundant) deliberation over possible options and in the absence of any further useful information. In the context of critical incidents (political, security, military, law enforcement) we have discovered that rather than disengaging and avoiding difficult choices, decision makers are acutely aware of the negative consequences that might arise if they failed to decide (i.e., the incident would escalate). The sensitization to possible future outcomes leads to intense deliberation over possible choices and their consequences and, ultimately, can result in a failure to take any action in time (or at all). We (i) discuss decision inertia as a novel psychological process of redundant deliberation during crises; (ii) define the concept and discuss the emerging studies in support of our tentative hypotheses regarding how the cognitively active process of deliberation can result in complete behavioral inactivity; and (iii) suggest recommendations and interventions for combatting inertia.

When presented with competing options, critical incident decision makers often struggle to commit to a choice (in particular when all options appear to yield negative consequences). Despite being motivated to take action in disasters, terrorism, major investigations, and complex political interventions, decision makers can become inert, looping between phases of situation assessment, option generation, and option evaluation. This "looping" is functionally redundant when it persists until they have lost the opportunity to take action. We define this as "decision inertia": the result of a process of (redundant) deliberation over possible options and in the absence of any further useful information. In the context of critical incidents (political, security, military, law enforcement) we have discovered that rather than disengaging and avoiding difficult choices, decision makers are acutely aware of the negative consequences that might arise if they failed to decide (i.e., the incident would escalate). The sensitization to possible future outcomes leads to intense deliberation over possible choices and their consequences and, ultimately, can result in a failure to take any action in time (or at all). We (i) discuss decision inertia as a novel psychological process of redundant deliberation during crises; (ii) define the concept and discuss the emerging studies in support of our tentative hypotheses regarding how the cognitively active process of deliberation can result in complete behavioral inactivity; and (iii) suggest recommendations and interventions for combatting inertia

This paper considers the desirability of the observed tendency of central banks to adjust interest rates only gradually in response to changes in economic conditions. It shows, in the context of a simple model of optimizing private-sector behavior, that such inertial behavior on the part of the central bank may indeed be optimal, in the sense of minimizing a loss function that penalizes inflation variations, deviations of output from potential, and interest-rate variability. Sluggish adjustment characterizes an optimal policy commitment, even though no such inertia would be present in the case of a reputationless (Markovian) equilibrium under discretion. Optimal interest-rate feedback rules are also characterized, and shown to involve substantial positive coefficients on lagged interest rates. This provides a theoretical explanation for the numerical results obtained by Rotemberg and Woodford (1998) in their quantitative model of the U.S. economy.

This paper considers the desirability of the observed tendency of central banks to adjust interest rates only gradually in response to changes in economic conditions. It shows, in the context of a simple model of optimizing private-sector behavior, that such inertial behavior on the part of the central bank may indeed be optimal, in the sense of minimizing a loss function that penalizes inflation variations, deviations of output from potential, and interest-rate variability. Sluggish adjustment characterizes an optimal policy commitment, even though no such inertia would be present in the case of a reputationless (Markovian) equilibrium under discretion. Optimal interest-rate feedback rules are also characterized, and shown to involve substantial positive coefficients on lagged interest rates. This provides a theoretical explanation for the numerical results obtained by Rotemberg and Woodford (1998) in their quantitative model of the U.S. economy.

We propose a simple infinite horizon of repeated elections with two candidates. Furthermore we suppose that the government policy presents some degree of inertia, i.e. a new government cannot completely change the policy implemented by the incumbent. When the policy inertia is strong enough, no party can win the election a consecutive infinite number of times.