Time-Consistent Monetary Policy under Output Persistence
This note merges the fact that real activity is persistent with a Barro-Gordon type model of endogenous monetary policy. It shows that persistence crucially affects policy choices. This applies in noncooperative games with a finite horizon and in games with an infinite horizon. Always, enforceable inflation announcements move higher when output persistence increases. Policymakers who discount future utility by 10 percent annually produce about ten times as much inflation under near-hysteresis as in a natural-rate scenario. A change in the policymarkers' time preference may affect inflation both ways, depending on present time preference and persistence. Copyright 1997 by Kluwer Academic Publishers
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