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Expectations, Credibility, And Time-Consistent Monetary Policy

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  • Ireland, Peter N.

Abstract

This paper addresses the problem of multiple equilibria ina model of time-consistent monetary policy. It suggests that this problemoriginates in the assumption that agents have rational expectations andproposes several alternative restrictions on expectations that allow themonetary authority to build credibility for a disinflationary policy bydemonstrating that it will stick to that policy even if it imposes short-runcosts on the economy. Starting with these restrictions, the paper derivesconditions that guarantee the uniqueness of the model s steady state;monetary policy in this unique steady state involves the constant deflationadvocated by Milton Friedman.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 4 (2000)
Issue (Month): 04 (December)
Pages: 448-466

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Handle: RePEc:cup:macdyn:v:4:y:2000:i:04:p:448-466_01

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  1. Barro, Robert J., 1986. "Reputation in a model of monetary policy with incomplete information," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 3-20, January.
  2. D. Backus & J. Driffil, 1998. "Inflation and Reputation," Levine's Working Paper Archive 625, David K. Levine.
  3. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  4. Taylor, John B, 1982. "Establishing Credibility: A Rational Expectations Viewpoint," American Economic Review, American Economic Association, vol. 72(2), pages 81-85, May.
  5. Stokey, Nancy L., 1991. "Credible public policy," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 627-656, October.
  6. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
  7. Grandmont, Jean-Michel & Laroque, Guy, 1986. "Stability of cycles and expectations," Journal of Economic Theory, Elsevier, vol. 40(1), pages 138-151, October.
  8. Fuchs, Gerard, 1979. "Is error learning behaviour stabilizing?," Journal of Economic Theory, Elsevier, vol. 20(3), pages 300-317, June.
  9. Blackburn, Keith & Christensen, Michael, 1989. "Monetary Policy and Policy Credibility: Theories and Evidence," Journal of Economic Literature, American Economic Association, vol. 27(1), pages 1-45, March.
  10. V. V. Chari & Patrick J Kehoe, 1998. "Sustainable Plans," Levine's Working Paper Archive 600, David K. Levine.
  11. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  12. McCallum, Bennett T, 1995. "Two Fallacies Concerning Central-Bank Independence," American Economic Review, American Economic Association, vol. 85(2), pages 207-11, May.
  13. Ariel Rubinstein, 1997. "Finite automata play the repeated prisioners dilemma," Levine's Working Paper Archive 1639, David K. Levine.
  14. Ireland, Peter N., 1997. "Sustainable monetary policies," Journal of Economic Dynamics and Control, Elsevier, vol. 22(1), pages 87-108, November.
  15. Fuchs, Gerard & Laroque, Guy, 1976. "Dynamics of Temporary Equilibria and Expectations," Econometrica, Econometric Society, vol. 44(6), pages 1157-78, November.
  16. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August.
  17. Tillmann, Georg, 1983. "Stability in a simple pure consumption loan model," Journal of Economic Theory, Elsevier, vol. 30(2), pages 315-329, August.
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