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Inflation Bias with Dynamic Phillips Curves and Impatient Policy Makers

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Author Info

  • Tatiana Kirsanova

    (Department of Economics, University of Exeter)

  • David Vines

    (Economics Department and Balliol College, University of Oxford, Australian National University and CEPR)

  • Simon Wren-Lewis

    (Department of Economics, University of Oxford)

Abstract

We generalise the analysis of inflation bias with dynamic Phillips curves in three respects. First, we examine the discretionary (time consistent) solution in cases where the Phillips curve has both a backward looking and forward-looking component. Second, we show that the commitment (time inconsistent) solution does not normally involve zero inflation and output at its natural rate. Instead, with a purely forward-looking Phillips curve and positive discounting, it will involve a dynamic path for inflation in which steady state inflation is below its target. In this sense, we obtain negative inflation bias. Third, we show that the timeless perspective policy has the same steady state as the commitment case, but without any short-term output gains.

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File URL: http://people.exeter.ac.uk/cc371/RePEc/dpapers/DP0802.pdf
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Bibliographic Info

Paper provided by Exeter University, Department of Economics in its series Discussion Papers with number 0802.

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Date of creation: 2008
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Handle: RePEc:exe:wpaper:0802

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Keywords: Inflation Bias; Commitment; Discretion; Timeless Perspective Policy;

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