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Expectation Traps and Monetary Policy

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  • Stefania Albanesi
  • V.V. Chari
  • Lawrence J. Christiano

Abstract

Why is it that inflation is persistently high in some periods and persistently low in other periods? We argue that lack of commitment in monetary policy may bear a large part of the blame. We show that, in a standard equilibrium model, absence of commitment leads to multiple equilibria, or expectation traps. In these traps, expectations of high or low inflation lead the public to take defensive actions which then make it optimal for the monetary authority to validate those expectations. We find support in cross-country evidence for key implications of the model.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8912.

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Date of creation: Apr 2002
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Publication status: published as Albanesi, Stefania, V. V. Chari and Lawrence J. Christiano. "Expectation Traps And Monetary Policy," Review of Economic Studies, 2003, v70(4,Oct), 715-741.
Handle: RePEc:nbr:nberwo:8912

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