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Does the Time-Consistency Problem Explain the Behavior of Inflation in the United States?

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  • Peter N. Ireland

    (Boston College)

Abstract

This paper derives the restrictions imposed by Barro and Gordon's theory of time-consistent monetary policy on a bivariate time-series model for inflation and unemployment and tests those restrictions using quarterly US data from 1960 through 1997. The results show that the data are consistent with the theory's implications for the long-run behavior of the two variables, indicating that the theory can explain inflation's initial rise and subsequent fall over the past four decades. The results also suggest that the theory must be extended to account more fully for the short-run dynamics that appear in the data.

Suggested Citation

  • Peter N. Ireland, 1998. "Does the Time-Consistency Problem Explain the Behavior of Inflation in the United States?," Boston College Working Papers in Economics 415, Boston College Department of Economics.
  • Handle: RePEc:boc:bocoec:415
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    More about this item

    Keywords

    Time-consistency; Inflation; Unemployment;
    All these keywords.

    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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