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Time Consistency When Open Market Operations are the Monetary Policy Instrument: Is There Really a Deflation Bias?

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  • Rankin, Neil

Abstract

We re-examine optimal monetary policy in a dynamic general equilibrium model where open market operations are the only policy instrument. The government optimizes purely over private agents? welfare. We use a money-in-the-utility-function approach with a welfare cost of ?current? inflation. Under commitment, for the most plausible specification time inconsistency takes the form of surprise inflation, if there is high initial government debt. Although ?orthodox?, this result contradicts Nicolini?s related analysis, in which surprise deflation is the main finding. Under discretion, we find that the long-run inflation rate is quite likely to be positive, not negative as in Obstfeld?s related analysis.

Suggested Citation

  • Rankin, Neil, 2001. "Time Consistency When Open Market Operations are the Monetary Policy Instrument: Is There Really a Deflation Bias?," CEPR Discussion Papers 2664, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:2664
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    More about this item

    Keywords

    Monetary policy; Time consistency; Inflation bias; Open market operations; Optimal seigniorage;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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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