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Expectation Traps and Monetary Policy

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

We examine whether standard monetary general equilibrium models with benevolent monetary authorities acting under discretion can generate persistent episodes of high and low inflation. Specifically, we ask whether private agents´ expectations of high or low inflation can lead them to take actions which then make it optimal for monetary authorities to validate these expectations. We find that this is the case for a large class of economies and that the result depends importantly on the properties of money demand.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 198.

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Handle: RePEc:igi:igierp:198
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