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Expectations, Credibility, And Time-Consistent Monetary Policy

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  • Ireland, Peter N.

Abstract

This 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 that 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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Suggested Citation

  • Ireland, Peter N., 2000. "Expectations, Credibility, And Time-Consistent Monetary Policy," Macroeconomic Dynamics, Cambridge University Press, vol. 4(04), pages 448-466, December.
  • Handle: RePEc:cup:macdyn:v:4:y:2000:i:04:p:448-466_01
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    References listed on IDEAS

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    1. Stokey, Nancy L., 1991. "Credible public policy," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 627-656, October.
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    Citations

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    Cited by:

    1. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
    2. Dawid, Herbert & Deissenberg, Christophe, 2005. "On the efficiency-effects of private (dis-)trust in the government," Journal of Economic Behavior & Organization, Elsevier, vol. 57(4), pages 530-550, August.
    3. Henry E. Siu, 2007. "Time consistent monetary policy with endogenous price rigidity," Staff Report 390, Federal Reserve Bank of Minneapolis.
    4. Peter N. Ireland, 2002. ""Rules Rather Than Discretion" After Twenty Five Years: What Have We Learned? What More Can We Learn?," Boston College Working Papers in Economics 530, Boston College Department of Economics.
    5. Erceg, Christopher J. & Levin, Andrew T., 2003. "Imperfect credibility and inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 915-944, May.
    6. Logan Rangasamy, 2011. "Food Inflation In South Africa: Some Implications For Economic Policy," South African Journal of Economics, Economic Society of South Africa, vol. 79(2), pages 184-201, June.
    7. Silvia Sgherri & Tamim Bayoumi, 2004. "Monetary Magic? How the Fed Improved the Supply Side of the Economy," Econometric Society 2004 Far Eastern Meetings 422, Econometric Society.
    8. Bayoumi, Tamim & Sgherri, Silvia, 2004. "Deconstructing the Art of Central Banking," CEPR Discussion Papers 4675, C.E.P.R. Discussion Papers.
    9. David Meenagh & Patrick Minford & Eric Nowell & Prakriti Sofat & Naveen Srinivasan, 2007. "Are the facts of UK inflation persistence to be explained by nominal rigidity or changes in monetary regime?," WEF Working Papers 0028, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
    10. Siu, Henry E., 2008. "Time consistent monetary policy with endogenous price rigidity," Journal of Economic Theory, Elsevier, pages 184-210.
    11. Bullard, James & Waller, Christopher J, 2004. "Central Bank Design in General Equilibrium," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(1), pages 95-113, February.
    12. Sleet, Christopher & Yeltekin, Sevin, 2007. "Recursive monetary policy games with incomplete information," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1557-1583, May.
    13. Meenagh, David & Minford, Patrick & Nowell, Eric & Sofat, Prakriti & Srinivasan, Naveen, 2009. "Can the facts of UK inflation persistence be explained by nominal rigidity?," Economic Modelling, Elsevier, pages 978-992.
    14. Logan Rangasamy, 2009. "Inflation Persistence And Core Inflation: The Case Of South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 77(3), pages 430-444, September.
    15. Mitra, Kaushik, 2003. " Desirability of Nominal GDP Targeting under Adaptive Learning," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(2), pages 197-220, April.
    16. Gil-Alana, Luis A., 2011. "Inflation in South Africa. A long memory approach," Economics Letters, Elsevier, vol. 111(3), pages 207-209, June.

    More about this item

    JEL classification:

    • 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
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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