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Reputational Constraints on Monetary Policy

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Author Info
Kenneth Rogoff

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Abstract

Recent advances in game theory have made it possible to study monetary policy credibility in a structured fashion. Some have concluded from these models that reputational considerations substantially discourage the monetary authorities from ever attempting surprise inflations. Hence legal constraints on money supply growth are unnecessary and can only be harmful. In this study, I critically assess a number of alternative models of monetary policy reputation, including some new variants. The bulk of the paper is concerned with comparing specific details of these models. One general conclusion is that although this first generation of monetary policy reputation models yields a significant number of important insights, it is premature to argue that time consistency is not a major issue in the design of monetary policy institutions. The main problem is that the models either yield a multiplicity of equilibria, or/and yield conclusions which are very sensitive to apparently minor changes in the information structure. Whereas an optimal reputational equilibrium may arise without any explicit cooperation among atomistic private agents, it is not (yet) clear why we should expect them to coordinate on the most favorable equilibrium. Strategic uncertainty may be an important drawback to institutional setups which place few constraints on monetary policy.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1986.

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Date of creation: Aug 1987
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Handle: RePEc:nbr:nberwo:1986

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  1. J. Peter Ferderer, 1999. "The Credibility of the Federal Reserve's Monetary Targets," Macroeconomics 9903006, EconWPA. [Downloadable!]
  2. R. Cellini & L. Lambertini, 2003. "The issue of time inconsistency revisited as an extended game," Working Papers 489, Dipartimento Scienze Economiche, Universita' di Bologna. [Downloadable!]
  3. Francisco Álvarez González & Christophe Deissenberg, 2001. "Cheating for the common good in a Macroeconomic policy game," Documentos del Instituto Complutense de Análisis Económico 0104, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales. [Downloadable!]
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  4. Manfred Neumann, 1991. "Precommitment by central bank independence," Open Economies Review, Springer, vol. 2(2), pages 95-112, June. [Downloadable!] (restricted)
  5. Laurence J. Kotlikoff & Torsten Persson & Lars E.O. Svensson, 1988. "Laws as Assets: A Possible Solution to the Time Consistency Problem," NBER Working Papers 2068, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Allan Drazen, 1997. "Policy Signaling in the Open Economy: A Re-Examination," NBER Working Papers 5892, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Ben Bernanke & Frederic Mishkin, 1993. "Central Bank Behavior and the Strategy of Monetary Policy: Observations From Six Industrialized Countries," NBER Working Papers 4082, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. T. Christopher Canavan, 1995. "Can Ignorance Make Central Banks Behave?," Boston College Working Papers in Economics 291., Boston College Department of Economics. [Downloadable!]
  9. Michelle R. Garfinkel & Seonghwan Oh, 1990. "Strategic discipline in monetary policy with private information: optimal targeting periods," Working Papers 1990-001, Federal Reserve Bank of St. Louis. [Downloadable!]
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  10. Philippe Bacchetta & Eric van Wincoop, 1998. "Capital Flows to Emerging Markets: Liberalization, Overshooting, and Volatility," NBER Working Papers 6530, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Silke Reeves, 1997. "Partial credibility and policy announcements: The problem of time inconsistency in macroeconomics revisited," Atlantic Economic Journal, International Atlantic Economic Society, vol. 25(4), pages 344-357, December. [Downloadable!] (restricted)
  12. Driessen, Joost & Perotti, Enrico C, 2004. "Confidence Building on Euro Conversion: Theory and Evidence from Currency Options," CEPR Discussion Papers 4180, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  13. Jon Faust, 1992. "Whom can we trust to run the Fed? Theoretical support for the founders' views," International Finance Discussion Papers 429, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  14. Linda S. Goldberg & Michael W. Klein, 2005. "Establishing Credibility: Evolving Perceptions of the European Central Bank," NBER Working Papers 11792, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. V.V. Chari & Patrick J. Kehoe, 1989. "Sustainable plans," Staff Report 122, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  16. Loisel, O., 2005. "Central Bank Reputation in a Forward-Looking Model," Documents de Travail 127, Banque de France. [Downloadable!]
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  17. Sebastian Edwards, 1993. "The Political Economy of Infaliton and Stabilization in Developing Countries," NBER Working Papers 4319, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  18. Allan Drazen & Paul R. Masson, 1993. "Credibility of Policies versus Credibility of Policymakers," NBER Working Papers 4448, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  19. Bosello, Francesco & Buchner, Barbara & Carraro, Carlo & Raggi, Davide, 2003. "Can Equity Enhance Efficiency? Some Lessons from Climate Negotiations," CEPR Discussion Papers 3606, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  20. Leonardo Bartolini & Allan Drazen, 1998. "When Liberal Policies Reflect External Shocks, What Do We Learn?," NBER Working Papers 5727, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  21. Herschel I. Grossman, 1992. "Monetary Economics: A Review Essay," NBER Working Papers 3686, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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