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How to avoid the consequences of anticipated monetary policies

Author

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  • Hans Gersbach

    (Alfred-Weber-Institut, Universit√Ąt Heidelberg, Grabengasse 14, D-69117 Heidelberg, GERMANY)

Abstract

This paper analyzes how monetary policy in an overlapping generations model can be designed to avoid inflationary consequences of anticipated changes of monetary policies. Avoiding these inflationary consequences will require a once and for all increase (decrease) in monetary growth immediately before the policy switch takes place if the relative risk aversion is greater (less) than unity. If the relative risk aversion is greater than unity, the avoidance of inflationary consequences is also time-consistent. Moreover, a general monetary feedback rule ensures that the economy picks the steady state with the lowest inflation rate. Our results suggest that the difference between unanticipated and anticipated policy switches may not be as important as generally assumed, because the consequences of the latter can be neutralized.

Suggested Citation

  • Hans Gersbach, 1999. "How to avoid the consequences of anticipated monetary policies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 14(3), pages 729-740.
  • Handle: RePEc:spr:joecth:v:14:y:1999:i:3:p:729-740
    Note: Received: September 19, 1995; revised version: July 27, 1998
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    More about this item

    Keywords

    Monetary policy design; Inflation; Anticipated policies; Overlapping generation model; Indeterminacy; Feedback rules.;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • 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

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