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Sustainable monetary policy and inflation expectations

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  • Armenter Roc

    (Federal Reserve Bank of Philadelphia, Pennsylvania, USA)

Abstract

The short-term nominal interest rate can anchor private-sector expectations into low inflation – more precisely, into the best equilibrium reputation can sustain. I introduce nominal asset markets in an infinite horizon version of the Barro-Gordon model and characterize the subset of sustainable policies compatible with any given asset price system at date t=0. While there are usually many sustainable inflation paths associated with a given set of asset prices, the best sustainable inflation path is implemented if and only if the short-term nominal bond is priced at a certain discount rate at date t=0.

Suggested Citation

  • Armenter Roc, 2016. "Sustainable monetary policy and inflation expectations," The B.E. Journal of Macroeconomics, De Gruyter, vol. 16(2), pages 301-334, June.
    • Handle: RePEc:bpj:bejmac:v:16:y:2016:i:2:p:301-334:n:4
    DOI: 10.1515/bejm-2014-0166
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    References listed on IDEAS

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    3. 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.
    4. Janssen, Maarten C.W., 2006. "Auctions as coordination devices," European Economic Review, Elsevier, vol. 50(3), pages 517-532, April.
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