Escape Dynamics and Policy Specification
AbstractIn his monograph The conquest of American inflation (1999) Sargent suggests that the sharp reduction in US inflation that took place under Volker may vindicate the type of econometric policy evaluation famously criticized by Lucas (1976). At the core of this vindication strory are the escape dynamics, recurrent sliding away from the path leading to the time-consistent sub-optimal equilibrium level of inflation. We try to understand here under which conditions this phenomenon arises. In particular, we note that economists, and consequently policymakers, knew long before the Lucas critique that in order to do policy analysis structural models were required. We thus endow our policymaker with a correctly specified model, one that takes explicitly into account the role of expectations. Using such a model, together with a policy that takes expectations as given, the escape dynamics do not appear. But they reappear when long run considerations of policy effects enter into the picture. We thus conclude that what really matters is the way in which the policymaker designs its policy, rather than the econometric specification of the model he uses.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 117.
Length: 27 pages
Date of creation: 2009
Date of revision:
Other versions of this item:
- NEP-ALL-2009-04-05 (All new papers)
- NEP-CBA-2009-04-05 (Central Banking)
- NEP-MAC-2009-04-05 (Macroeconomics)
- NEP-MON-2009-04-05 (Monetary Economics)
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.:
- 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.
- Ireland, Peter N., 1999. "Does the time-consistency problem explain the behavior of inflation in the United States?," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 279-291, October.
- Peter Ireland, 1998. "Matlab code for Does the Time-Consistency Problem Explain the Behavior of Inflation in the United States?," QM&RBC Codes 44, Quantitative Macroeconomics & Real Business Cycles.
- Wieland, Volker, 2000.
"Learning by doing and the value of optimal experimentation,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 24(4), pages 501-534, April.
- Volker Wieland, 1996. "Learning by doing and the value of optimal experimentation," Finance and Economics Discussion Series 96-5, Board of Governors of the Federal Reserve System (U.S.).
- Andrea Gerali & Francesco Lippi, 2002.
"On the 'conquest' of inflation,"
Temi di discussione (Economic working papers)
444, Bank of Italy, Economic Research and International Relations Area.
- Friedman, Benjamin M., 1979. "Optimal expectations and the extreme information assumptions of `rational expectations' macromodels," Journal of Monetary Economics, Elsevier, vol. 5(1), pages 23-41, January.
- Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
- 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.
- Robert J. Barro & David B. Gordon, 1983. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
- Robert J. Barro & David B. Gordon, 1984.
"Rules, Discretion and Reputation in a Model of Monetary Policy,"
NBER Working Papers
1079, National Bureau of Economic Research, Inc.
- 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.
- Bennett T. McCallum, 1996.
"Crucial Issues Concerning Central Bank Independence,"
NBER Working Papers
5597, National Bureau of Economic Research, Inc.
- McCallum, Bennett T., 1997. "Crucial issues concerning central bank independence," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 99-112, June.
- Robert G. King & Mark W. Watson, 1994.
"The post-war U.S. Phillips curve: a revisionist econometric history,"
Working Paper Series, Macroeconomic Issues
94-14, Federal Reserve Bank of Chicago.
- King, Robert G. & Watson, Mark W., 1994. "The post-war U.S. phillips curve: a revisionist econometric history," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 157-219, December.
- Cho, In-Koo & Williams, Noah & Sargent, Thomas J, 2002.
"Escaping Nash Inflation,"
Review of Economic Studies,
Wiley Blackwell, vol. 69(1), pages 1-40, January.
- Beck, Gunter W. & Wieland, Volker, 2002. "Learning and control in a changing economic environment," Journal of Economic Dynamics and Control, Elsevier, vol. 26(9-10), pages 1359-1377, August.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marianne Sensier).
If references are entirely missing, you can add them using this form.