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The Credibility Problem Revisited: Thirty Years on from Kydland and Prescott

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  • Paul Levine

    (University of Surrey)

  • Joseph Pearlman

    (London Metropolitan University)

  • Bo Yang

    (University of Surrey)

Abstract

Macroeconomics research has changed profoundly since the Kydland-Prescott seminal paper. In order to address the Lucas Critique, modelling now is based on microfoundations treating agents as rational utility optimizers. Bayesian estimation has produced models which are more data consistent than those based simply on calibration. With micro-foundations and new linear-quadratic techniques, normative policy based on welfare analysis is now possible. In the open economy, policy involves a ‘game’ with policymakers and private institutions or private individuals as players. This paper attempts to reassess the Kydland-Prescott contribution in the light of these developments.

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Bibliographic Info

Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 1807.

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Length: 37 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:sur:surrec:1807

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Keywords: Monetary rules; commitment; discretion; open economy; coordination gains.;

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Cited by:
  1. Adolfson, Malin & Laseén, Stefan & Lindé, Jesper & Svensson, Lars E.O., 2009. "Monetary Policy Trade-Offs in an Estimated Open-Economy DSGE Model," Working Paper Series 232, Sveriges Riksbank (Central Bank of Sweden).
  2. Paul Middleditch, 2010. "A New Keynesian Model with Heterogeneous Price Setting," Centre for Growth and Business Cycle Research Discussion Paper Series 150, Economics, The Univeristy of Manchester.

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