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Delegation, time inconsistency and sustainable equilibrium

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Author Info
Basso, Henrique S.

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Abstract

This paper analyzes the effectiveness of delegation in solving the time inconsistency problem of monetary policy using a microfounded general equilibrium model where delegation and reappointment are explicitly included into the government's strategy. The method of Chari and Kehoe [1990. Sustainable plans. Journal of Political Economy 98 (4), 783-802] is applied to characterize the entire set of sustainable outcomes. Countering McCallum's [1995. Two fallacies concerning central-bank independence. American Economic Review 85 (2), 207-211] second fallacy, delegation is able to eliminate the time inconsistency problem, with the commitment policy being sustained under discretion for any intertemporal discount rate.

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Publisher Info
Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 33 (2009)
Issue (Month): 8 (August)
Pages: 1617-1629
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Handle: RePEc:eee:dyncon:v:33:y:2009:i:8:p:1617-1629

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Keywords: Central bank Monetary policy Institutional design;

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  1. Persson, Torsten & Tabellini, Guido, 1999. "Political economics and macroeconomic policy," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 22, pages 1397-1482 Elsevier. [Downloadable!] (restricted)
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  2. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121. [Downloadable!] (restricted)
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  3. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November. [Downloadable!] (restricted)
  4. Chari, V V & Kehoe, Patrick J, 1990. "Sustainable Plans," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 783-802, August. [Downloadable!] (restricted)
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  5. John Driffill & Zeno Rotondi, 2006. "Credibility of Optimal Monetary Delegation: Comment," American Economic Review, American Economic Association, vol. 96(4), pages 1361-1366, September. [Downloadable!]
  6. Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-96, March. [Downloadable!] (restricted)
  7. McCallum, Bennett T., 1997. "Crucial issues concerning central bank independence," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 99-112, June. [Downloadable!] (restricted)
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  8. Ireland, Peter N., 1997. "Sustainable monetary policies," Journal of Economic Dynamics and Control, Elsevier, vol. 22(1), pages 87-108, November. [Downloadable!] (restricted)
  9. Schaumburg, Ernst & Tambalotti, Andrea, 2007. "An investigation of the gains from commitment in monetary policy," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 302-324, March. [Downloadable!] (restricted)
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  10. 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. [Downloadable!] (restricted)
  11. Stefania Albanesi & V. V. Chari & Lawrence J. Christiano, 2003. "Expectation traps and monetary policy," Staff Report 319, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  12. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, vol. 87(1), pages 98-114, March. [Downloadable!] (restricted)
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  13. Jensen, Henrik, 1997. "Credibility of Optimal Monetary Delegation," American Economic Review, American Economic Association, vol. 87(5), pages 911-20, December. [Downloadable!] (restricted)
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