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Time-consistent Monetary Policy Rules

Author

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  • Gerhard Sorger

    (Queen Mary, University of London)

Abstract

A monetary policy rule is a function mapping any given output level of the economy to a corresponding rate of inflation. Such a rule is time-consistent if the central bank has no incentive to deviate from it. Within a simple dynamic model combining an output-inflation trade-off with rational private-sector expectations we study existence and properties of time-consistent monetary policy rules. It is shown that such rules exist only if (i) the central bank gives relatively high weight to price stability and relatively low weight to output stabilization and if (ii) the random shocks to the economy are not too strong. If time-consistent monetary policy rules exist, they are generically non-unique.

Suggested Citation

  • Gerhard Sorger, 2001. "Time-consistent Monetary Policy Rules," Working Papers 442, Queen Mary University of London, School of Economics and Finance.
  • Handle: RePEc:qmw:qmwecw:wp442
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    File URL: http://www.econ.qmul.ac.uk/media/econ/research/workingpapers/archive/wp442.pdf
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    Keywords

    Monetary policy; Time-consistency; Policy rules; Inflation;

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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