Barro-Gordon Revisited: Reputational Equilibria in a New Keynesian Model
AbstractThe aim of this paper is to solve the inconsistency problem à la Barro/Gordon within a New Keynesian model and to derive time-consistent interest rate rules of Taylor-type. We find a multiplicity of time-consistent rules. In contrast to the famous Kydland/Prescott-Barro/Gordon approach, implementing a monetary rule where the cost and benefit resulting from inconsistent policy coincide – which implies a net gain of inconsistent policy behavior equal to zero – is not optimal. Instead, the solution can be improved by moving into the time-consistent area where the net gain of inconsistent policy is negative. When additionally considering a cost-push shock, the area of time-consistent simple rules of Taylor type becomes graphically smaller. Finally, we find that numerous estimated Taylor rules are time-inconsistent since the empirically observed coefficient on inflation is too low.
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Bibliographic InfoArticle provided by Credit and Capital Markets in its journal Kredit und Kapital.
Volume (Year): 45 (2012)
Issue (Month): 1 ()
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Web page: http://www.credit-and-capital-markets.de/
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
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