Expectations, Credibility, and Time-Consistent Monetary Policy
AbstractThis paper addresses the problem of multiple equilibria in a model of time-consistent monetary policy. It suggests that this 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 the policy even if it imposes short-run costs on the economy. Starting with these restrictions, the paper derives conditions that guarantee the uniqueness of the model's steady state; monetary policy in this unique steady state involves the constant deflation advocated by Milton Friedman.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7234.
Date of creation: Jul 1999
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Other versions of this item:
- Ireland, Peter N., 2000. "Expectations, Credibility, And Time-Consistent Monetary Policy," Macroeconomic Dynamics, Cambridge University Press, vol. 4(04), pages 448-466, December.
- Peter N. Ireland, 1999. "Expectations, Credibility, and Time-Consistent Monetary Policy," Boston College Working Papers in Economics 425, Boston College Department of Economics.
- Peter N. Ireland, 1998. "Expectations, credibility, and time-consistent monetary policy," Working Paper 9812, Federal Reserve Bank of Cleveland.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-1999-07-28 (All new papers)
- NEP-DGE-1999-07-28 (Dynamic General Equilibrium)
- NEP-MON-1999-07-28 (Monetary Economics)
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