This paper proposes a simple framework that generalizes the timing structure of macroeconomic (as well as other) games. Building on alternative move games and models of "rational inattention" the players' actions may be rigid, ie optimally chosen to be infrequent. This rigidity makes the game more dynamic/asynchronous and by linking successive periods it can serve as commitment. Therefore, it can enhance cooperation and often eliminate inefficient equilibrium outcomes. We apply the framework to the Kydland-Prescott-Barro-Gordon monetraty policy game and dervice the conditions - the sufficient degree of commitment - under which the influential time-inconsistency problem disappears. Interestingly, (i) this can happen even in a finite game (possibly as short as two periods), (ii) the required degree of commitment may be rather (even infinitesimally) low and (iii) the policymaker's commitment may substitute for his conservatism and/or patience in achieving credibility. The analysis makes several predictions about explicit inflation targeting and central bank dependence (and their relationship) that we show to be empirically supported. In doing so we show that our theoretical results reconcile some conflicting empirical findings of the literature.
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Paper provided by Australian National University, Centre for Applied Macroeconomic Analysis in its series CAMA Working Papers with number
2007-10.
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Find related papers by JEL classification: C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
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