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Reputation in a model of monetary policy with incomplete information

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  • Barro, Robert J.

Abstract

Previous models of rules versus discretion are extended to include uncertainty about the policymaker's "type." When people observe low inflation, they raise the possibility that the policymaker is committed to low inflation (type 1). This enhancement of reputation gives the uncommitted policymaker (type 2) an incentive to masquerade as the committed type. In the equilibrium the policymaker of type 1 delivers surprisingly low inflation -- with corresponding costs to the economy -- over an extended interval. The type 2 person mimics this outcome for awhile, but shift seventually to high inflation. This high inflation is surprising initially, but subsequently becomes anticipated.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 17 (1986)
Issue (Month): 1 (January)
Pages: 3-20

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Handle: RePEc:eee:moneco:v:17:y:1986:i:1:p:3-20

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Web page: http://www.elsevier.com/locate/inca/505566

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  1. Paul Milgrom & John Roberts, 1997. "Predation, reputation , and entry deterrence," Levine's Working Paper Archive 1460, David K. Levine.
  2. 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.
  3. Robert J. Barro, 1982. "Inflationary Finance under Discrepion and Rules," NBER Working Papers 0889, National Bureau of Economic Research, Inc.
  4. Green, Edward J. & Porter, Robert H., 1982. "Noncooperative Collusion Under Imperfect Price Information," Working Papers 367, California Institute of Technology, Division of the Humanities and Social Sciences.
  5. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, vol. 27(2), pages 253-279, August.
  6. Horn, Henrik & Persson, Torsten, 1988. "Exchange rate policy, wage formation and credibility," European Economic Review, Elsevier, vol. 32(8), pages 1621-1636, October.
  7. Backus, David & Driffill, John, 1985. "Rational Expectations and Policy Credibility Following a Change in Regime," Review of Economic Studies, Wiley Blackwell, vol. 52(2), pages 211-21, April.
  8. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, vol. 38(113), pages 1-12, January.
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