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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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Author Info
Rankin, Neil

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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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2664.

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Date of creation: Jan 2001
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Handle: RePEc:cpr:ceprdp:2664

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Related research
Keywords: Inflation Bias; Monetary Policy; Open Market Operations; Optimal Seigniorage; Time Consistency;

Find related papers by 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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