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Expectation Traps and Monetary Policy

Author

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  • Stefania Albanesi
  • V. V. Chari
  • Lawrence J. Christiano

Abstract

Why is inflation persistently high in some periods and low in others? The reason may be the absence of commitment in monetary policy. In a standard model, absence of commitment leads to multiple equilibria, or expectation traps, even without trigger strategies. In these traps, expectations of high or low inflation lead the public to take defensive actions, which then make accommodating those expectations the optimal monetary policy. Under commitment, the equilibrium is unique and the inflation rate is low on average. This analysis suggests that institutions which promote commitment can prevent high inflation episodes from recurring. Copyright 2003, Wiley-Blackwell.

Suggested Citation

  • Stefania Albanesi & V. V. Chari & Lawrence J. Christiano, 2003. "Expectation Traps and Monetary Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(4), pages 715-741.
    • Handle: RePEc:oup:restud:v:70:y:2003:i:4:p:715-741
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    File URL: http://hdl.handle.net/10.1111/1467-937X.00264
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    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • 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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