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Expectations, credibility, and time-consistent monetary policy

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Author Info
Peter N. Ireland

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Abstract

This paper addresses the problem of multiple equilibria in a model of time-consistent monetary policy. The author suggests that the problem originates in the assumption that agents have rational expectations and proposes several alternative restrictions on expectations that allow the monetary authority to build credibility for a disinflationary policy by demonstrating that it will stick to that policy even if it imposes short-run costs on the economy.

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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 9812.

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Length: 39
Date of creation: 1998
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Handle: RePEc:fip:fedcwp:9812

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Keywords: Monetary policy ; Rational expectations (Economic theory);

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Stokey, Nancy L., 1991. "Credible public policy," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 627-656, October. [Downloadable!] (restricted)
  2. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121. [Downloadable!] (restricted)
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  3. Tillmann, Georg, 1983. "Stability in a simple pure consumption loan model," Journal of Economic Theory, Elsevier, vol. 30(2), pages 315-329, August. [Downloadable!] (restricted)
  4. Bennett T. McCallum, 1995. "Two Fallacies Concerning Central Bank Independence," NBER Working Papers 5075, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Ireland, Peter N., 1997. "Sustainable monetary policies," Journal of Economic Dynamics and Control, Elsevier, vol. 22(1), pages 87-108, November. [Downloadable!] (restricted)
  6. Blackburn, Keith & Christensen, Michael, 1989. "Monetary Policy and Policy Credibility: Theories and Evidence," Journal of Economic Literature, American Economic Association, vol. 27(1), pages 1-45, March. [Downloadable!] (restricted)
  7. Barro, Robert J., 1986. "Reputation in a model of monetary policy with incomplete information," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 3-20, January. [Downloadable!] (restricted)
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  8. Fuchs, Gerard, 1979. "Is error learning behaviour stabilizing?," Journal of Economic Theory, Elsevier, vol. 20(3), pages 300-317, June. [Downloadable!] (restricted)
  9. Grandmont, Jean-Michel & Laroque, Guy, 1986. "Stability of cycles and expectations," Journal of Economic Theory, Elsevier, vol. 40(1), pages 138-151, October. [Downloadable!] (restricted)
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  10. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August. [Downloadable!] (restricted)
  11. Chari, V V & Kehoe, Patrick J, 1990. "Sustainable Plans," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 783-802, August. [Downloadable!] (restricted)
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  12. Fuchs, Gerard & Laroque, Guy, 1976. "Dynamics of Temporary Equilibria and Expectations," Econometrica, Econometric Society, vol. 44(6), pages 1157-78, November. [Downloadable!] (restricted)
  13. Taylor, John B, 1982. "Establishing Credibility: A Rational Expectations Viewpoint," American Economic Review, American Economic Association, vol. 72(2), pages 81-85, May. [Downloadable!] (restricted)
  14. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June. [Downloadable!] (restricted)
  15. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Oxford University Press, vol. 18(2), pages 203-20, April.
  16. Rubinstein, Ariel, 1986. "Finite automata play the repeated prisoner's dilemma," Journal of Economic Theory, Elsevier, vol. 39(1), pages 83-96, June. [Downloadable!] (restricted)
  17. Backus, David & Driffill, John, 1985. "Inflation and Reputation," American Economic Review, American Economic Association, vol. 75(3), pages 530-38, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Meenagh, David & Minford, Patrick & Nowell, Eric & Sofat, Prakriti & Srinivasan, Naveen, 2008. "Can the Facts of UK Inflation Persistence be Explained by Nominal Rigidity?," CEPR Discussion Papers 6834, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Kaushik Mitra & James Bullard, . "Learning About Monetary Policy Rules," Discussion Papers 00/41, Department of Economics, University of York. [Downloadable!]
    Other versions:
  3. Collard, Fabrice & Dellas, Harris, 2004. "The New Keynesian Model with Imperfect Information and Learning," IDEI Working Papers 273, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  4. Peter N. Ireland, 2002. ""Rules Rather Than Discretion" After Twenty Five Years: What Have We Learned? What More Can We Learn?," Boston College Working Papers in Economics 530, Boston College Department of Economics. [Downloadable!]
  5. Kaushik Mitra, . "Desirability of Nominal GDP Targeting Under Adaptive Learning," Discussion Papers 00/60, Department of Economics, University of York. [Downloadable!]
    Other versions:
  6. James Bullard & Christopher J. Waller, 2002. "Central bank design in general equilibrium," Working Papers 1998-002, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
  7. Silvia Sgherri & Tamim Bayoumi, 2004. "Monetary Magic? How the Fed Improved the Supply Side of the Economy," Econometric Society 2004 Far Eastern Meetings 422, Econometric Society. [Downloadable!]
    Other versions:
  8. Agnès d'Artigues and Thierry Vignolo, . "Long-run Equilibria in the Monetary Policy Game," The Electronic Journal of Evolutionary Modeling and Economic Dynamics, IFReDE - Université Montesquieu Bordeaux IV. [Downloadable!]
  9. David Meenagh & Patrick Minford & Eric Nowell & Prakriti Sofat & Naveen Srinivasan, 2007. "Are the facts of UK inflation persistence to be explained by nominal rigidity or changes in monetary regime?," WEF Working Papers 0028, ESRC World Economy and Finance Research Programme, Birkbeck, University of London. [Downloadable!]
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