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The issue of time inconsistency revisited as an extended game

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  • R. Cellini
  • L. Lambertini

Abstract

We reformulate the monetary policy model of Barro and Gordon (1983a) by using an extended game with observable delay where the hierarchy of play between the central bank and the private sector is endogenous. This allows us to endogenise the institutional setup wherein the monetary policy game takes place. We show that positive inflation may be observed due to mixed strategies rather than time inconsistency.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 489.

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Date of creation: 2003
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Handle: RePEc:bol:bodewp:489

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  1. d'Aspremont, C. & Gerard-Varet, L. -A., 1980. "Stackelberg-solvable games and pre-play communication," Journal of Economic Theory, Elsevier, Elsevier, vol. 23(2), pages 201-217, October.
  2. Rogoff, Kenneth, 1987. "Reputational constraints on monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 26(1), pages 141-181, January.
  3. Persson, Torsten & Tabellini, Guido, 1999. "Political economics and macroeconomic policy," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 22, pages 1397-1482 Elsevier.
  4. Kydland, Finn, 1977. "Equilibrium solutions in dynamic dominant-player models," Journal of Economic Theory, Elsevier, Elsevier, vol. 15(2), pages 307-324, August.
  5. Xie, Danyang, 1997. "On Time Inconsistency: A Technical Issue in Stackelberg Differential Games," Journal of Economic Theory, Elsevier, Elsevier, vol. 76(2), pages 412-430, October.
  6. Fernando Alvarez & Patrick J. Kehoe & Pablo Andrés Neumeyer, 2004. "The Time Consistency of Optimal Monetary and Fiscal Policies," Econometrica, Econometric Society, Econometric Society, vol. 72(2), pages 541-567, 03.
  7. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(4), pages 589-610, August.
  8. Hamilton, J.H. & Slutsky, S.M., 1988. "Endogenous Timing In Duopoly Games: Stackelberg Or Cournot Equilibria," Papers, Florida - College of Business Administration 88-4, Florida - College of Business Administration.
  9. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  10. Ireland, Peter N., 1997. "Sustainable monetary policies," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 22(1), pages 87-108, November.
  11. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
  12. Persson, Mats & Persson, Torsten & Svensson, Lars E O, 1987. "Time Consistency of Fiscal and Monetary Policy," Econometrica, Econometric Society, Econometric Society, vol. 55(6), pages 1419-31, November.
  13. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  14. Cohen, Daniel & Michel, Philippe, 1988. "How Should Control Theory Be Used to Calculate a Time-Consistent Government Policy?," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 55(2), pages 263-74, April.
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