EXPECTATIONS, CREDIBILITY, AND TIME-CONSISTENT MONETARY POLICY

Peter N. Ireland

37 citations0/0 files storedMacroeconomic Dynamics

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Monetary Policy and Economic Impact Economic Theory and Policy Economic theories and models

Abstract

This paper addresses the problem of multiple equilibria in a model of time-consistent monetary policy. It suggests that this problem originates in the assumption that agents have rational expectations and proposes several alternative restrictions on expectations that allow the monetary authority to build credibility for a disinflationary policy by demonstrating that it will stick to that policy even if it imposes short-run costs on the economy. Starting with these restrictions, the paper derives conditions that guarantee the uniqueness of the model's steady state; monetary policy in this unique steady state involves the constant deflation advocated by Milton Friedman.

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References

1977Rules Rather than Discretion: The Inconsistency of Optimal Plans 1983Rules, discretion and reputation in a model of monetary policy 1995Bounded Rationality in Macroeconomics 1989Convergence of least squares learning mechanisms in self-referential linear stochastic models 1986Finite automata play the repeated prisoner's dilemma 1980EQUILIBRIUM IN A PURE CURRENCY ECONOMY 1995Two Fallacies Concerning Central Bank Independence 1988MONETARY POLICY AND POLICY CREDIBILITY THEORIES AND EVIDENCE

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