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Time Consistency and Shocks to the Natural Rate of Output

Author

Listed:
  • Richard W. Douglas, Jr.

    (Bowling Green State University)

Abstract

This paper develops a model to extend the analysis of the well known "time consistency" problem based on the proposition that supply shocks can alter the natural rate of output, which can induce a central bank to be time inconsistent. The effects of inflation targets and price targets are compared, and the use of both kinds of targets are shown to improve the response of the central bank under certain conditions. The analysis suggests that a flexible approach to targeting, as is practiced in countries which have tried inflation targets, has certain advantages.

Suggested Citation

  • Richard W. Douglas, Jr., 2003. "Time Consistency and Shocks to the Natural Rate of Output," Journal of Economic Insight, Missouri Valley Economic Association, vol. 29(2), pages 21-35.
    • Handle: RePEc:mve:journl:v:29:y:2003:i:2:p:21-35
    as

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    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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