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Barro-Gordon Revisited: Reputational Equilibria in a New Keynesian Model

Author

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  • Hans-Werner Wohltmann

    (Christian-Albrechts- Universität zu Kiel, Institut für Volkswirtschaftslehre, Olshausenstraße 40, D-24118 Kiel)

  • Alexander Totzek

    (Christian-Albrechts- Universität zu Kiel, Institut für Volkswirtschaftslehre, Olshausenstraße 40, D-24118 Kiel)

Abstract

The aim of this paper is to solve the inconsistency problem à la Barro/Gordon within a New Keynesian model and to derive time-consistent interest rate rules of Taylor-type. We find a multiplicity of time-consistent rules. In contrast to the famous Kydland/Prescott-Barro/Gordon approach, implementing a monetary rule where the cost and benefit resulting from inconsistent policy coincide – which implies a net gain of inconsistent policy behavior equal to zero – is not optimal. Instead, the solution can be improved by moving into the time-consistent area where the net gain of inconsistent policy is negative. When additionally considering a cost-push shock, the area of time-consistent simple rules of Taylor type becomes graphically smaller. Finally, we find that numerous estimated Taylor rules are time-inconsistent since the empirically observed coefficient on inflation is too low.

Suggested Citation

  • Hans-Werner Wohltmann & Alexander Totzek, 2012. "Barro-Gordon Revisited: Reputational Equilibria in a New Keynesian Model," Credit and Capital Markets, Credit and Capital Markets, vol. 45(1), pages 27-50.
  • Handle: RePEc:kuk:journl:v:45:y:2012:i:1:p:27-50
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    References listed on IDEAS

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    Cited by:

    1. Offick, Sven & Wohltmann, Hans-Werner, 2014. "Bernanke/Blinder revisited - The New Keynesian model with credit channel," Economics Working Papers 2014-10, Christian-Albrechts-University of Kiel, Department of Economics.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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