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Expectation Traps and Monetary Policy

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Author Info
Stefania Albanesi
V.V. Chari
Lawrence J. Christiano

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Abstract

We examine whether standard monetary general equilibrium models with benevolent monetary authorities acting under discretion can generate persistent episodes of high and low inflation. Specifically, we ask whether private agents´ expectations of high or low inflation can lead them to take actions which then make it optimal for monetary authorities to validate these expectations. We find that this is the case for a large class of economies and that the result depends importantly on the properties of money demand.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 198.

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Handle: RePEc:igi:igierp:198

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  1. Stefania Albanesi & V. V. Chari & Lawrence J. Christiano, 2002. "Expectation Traps and Monetary Policy," Macroeconomics 0201004, EconWPA. [Downloadable!]
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  2. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93. [Downloadable!] (restricted)
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  6. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September. [Downloadable!] (restricted)
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  8. Thomas Sargent & Noah Williams & Tao Zha, 2006. "The Conquest of South American Inflation," NBER Working Papers 12606, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. McCallum, Bennett T., 1997. "Crucial issues concerning central bank independence," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 99-112, June. [Downloadable!] (restricted)
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  13. Chari, V. V. & Christiano, Lawrence J. & Eichenbaum, Martin, 1998. "Expectation Traps and Discretion," Journal of Economic Theory, Elsevier, vol. 81(2), pages 462-492, August. [Downloadable!] (restricted)
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  14. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August. [Downloadable!] (restricted)
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  15. Cole, Harold L & Stockman, Alan C, 1992. "Specialization, Transactions Technologies, and Money Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(2), pages 283-98, May. [Downloadable!] (restricted)
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  16. Robert G. King & Alexander L. Wolman, 1996. "Inflation Targeting in a St. Louis Model of the 21st Century," NBER Working Papers 5507, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  17. Ireland, Peter N, 1994. "Money and Growth: An Alternative Approach," American Economic Review, American Economic Association, vol. 84(1), pages 47-65, March. [Downloadable!] (restricted)
  18. Julio J. Rotemberg & Michael Woodford, 1998. "Interest-Rate Rules in an Estimated Sticky Price Model," NBER Working Papers 6618, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  19. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall. [Downloadable!]
  20. Bental, B. & Eckstein, Z., 1995. "A Neoclassical Interpretation of Inflation and Stabilization in Israel," Papers 28-95, Tel Aviv.
  21. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2001. "The pitfalls of monetary discretion," Working Paper 01-08, Federal Reserve Bank of Richmond. [Downloadable!]
  22. Schreft, Stacey L., 1992. "Welfare-improving credit controls," Journal of Monetary Economics, Elsevier, vol. 30(1), pages 57-72, October. [Downloadable!] (restricted)
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  23. Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999. "Optimal Monetary Policy with Staggered Wage and Price Contracts," Computing in Economics and Finance 1999 1151, Society for Computational Economics. [Downloadable!]
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  24. Rotemberg, Julio J., 1996. "Prices, output, and hours: An empirical analysis based on a sticky price model," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 505-533, June. [Downloadable!] (restricted)
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  25. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc. [Downloadable!]
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  26. Peter N. Ireland, 1998. "Does the Time-Consistency Problem Explain the Behavior of Inflation in the United States?," Boston College Working Papers in Economics 415, Boston College Department of Economics. [Downloadable!]
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  27. Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, vol. 46(6), pages 1411-28, November. [Downloadable!] (restricted)
  28. Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 53-84, December. [Downloadable!] (restricted)
  29. 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)
  30. Vining, Daniel R, Jr & Elwertowski, Thomas C, 1976. "The Relationship between Relative Prices and the General Price Level," American Economic Review, American Economic Association, vol. 66(4), pages 699-708, September. [Downloadable!] (restricted)
  31. Neiss, Katharine S, 1999. "Discretionary Inflation in a General Equilibrium Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 357-74, August.
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