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Inflation Bias with Dynamic Phillips Curves and Impatient Policy Makers

Author

Listed:
  • Kirsanova Tatiana

    (University of Exeter)

  • Vines David

    (University of Oxford)

  • Wren-Lewis Simon

    (University of Oxford)

Abstract

We generalize the analysis of inflation bias with dynamic Phillips curves in three respects. First, we examine the discretionary (time consistent) solution in cases where the Phillips curve has both a backward-looking and forward-looking component. Second, we show that the commitment (time inconsistent) solution does not normally involve zero inflation and output at its natural rate. Instead, with a purely forward-looking Phillips curve and positive discounting, it will involve a dynamic path for inflation in which steady state inflation is below its target. In this sense, we obtain negative inflation bias. Third, we show that the timeless perspective policy has the same steady state as the commitment case, but without any short-term output gains.

Suggested Citation

  • Kirsanova Tatiana & Vines David & Wren-Lewis Simon, 2009. "Inflation Bias with Dynamic Phillips Curves and Impatient Policy Makers," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-26, August.
    • Handle: RePEc:bpj:bejmac:v:9:y:2009:i:1:n:32
    DOI: 10.2202/1935-1690.1731
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    Cited by:

    1. Simon Wren-Lewis, 2011. "Comparing the delegation of monetary and fiscal policy," Economics Series Working Papers 540, University of Oxford, Department of Economics.
    2. Hübner, Malte & Vannoorenberghe, Gonzague, 2015. "Patience and Inflation," MPRA Paper 65811, University Library of Munich, Germany.
    3. Scott C. Patrick, 2020. "How Much Better Is Commitment Policy Than Discretionary Policy? Evidence From Six Developed Economies," The B.E. Journal of Macroeconomics, De Gruyter, vol. 20(2), pages 1-28, June.
    4. Woodford, Michael, 2010. "Optimal Monetary Stabilization Policy," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 14, pages 723-828, Elsevier.

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    More about this item

    Keywords

    inflation bias; commitment; discretion; timeless perspective policy;
    All these keywords.

    JEL classification:

    • 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
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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