Time-consistent Policy and Persistent Changes in Inflation, Issue 3529
This paper presents a model of dynamically consistent monetary policy that explains changes in inflation over time. In the model -- as in the postwar United States -- adverse supply shocks trigger persistent increases in inflation, and disinflation occurs when a tough policymaker creates a recession. The paper also proposes an approach to selecting a unique, plausible equilibrium in infinite-horizon models of monetary policy.
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accomodate actions depend adverse shock adverse supply shock Appendix assumption Asymmetric Information Backus-Driffill Barro behavior Bureau of Economic Canzoneri CHANGES IN INFLATION chooses zero inflation create surprise inflation creates a recession current loss David Romer derive conditions discount factor Econometrica exogenous shocks Fart gains overall high inflation implies inertial inflation inflation rises keeping inflation low Laurence Ball Lawrence Summers lemma loss function low inflation Markov criterion Markov perfect equilibrium Maskin and Tirole Massachusetts Avenue Mixed strategy Model of Monetary moderate strengthening Monetary Policy Nash equilibria Non-Markov oligopoly OPEC parameter values perfect Nash equilibrium PERSISTENT CHANGES POLICY AND PERSISTENT policy shifts policymakers choose possible deviations present value previous models private information proposed equilibrium range of parameter Rational Expectations regime rise in inflation Romer rule out equilibria Section seignorage shock triggers shocks and policy short run gains TIME-CONSISTENT POLICY trend inflation unemployment value of W's W's loss