Sustainable monetary policy and inflation expectations
AbstractThe author shows that the short-term nominal interest rate can anchor private-sector expectations into low inflation more precisely, into the best equilibrium reputation can sustain. He introduces nominal asset markets in an infinite horizon version of the Barro-Gordon model. The author then analyzes the subset of sustainable policies compatible with any given asset price system at date t = 0. While there are usually many sustainable inflation paths associated with a given set of asset prices, the best sustainable inflation path is implemented if and only if the short-term nominal bond is priced at a certain discount rate. His results suggest that policy frameworks must also be evaluated on their ability to coordinate expectations.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 10-20.
Date of creation: 2010
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-06-26 (All new papers)
- NEP-CBA-2010-06-26 (Central Banking)
- NEP-MAC-2010-06-26 (Macroeconomics)
- NEP-MON-2010-06-26 (Monetary Economics)
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