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How severe is the time-inconsistency problem in monetary policy?

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

Abstract

This study analyzes two monetary economies, a cash-credit good model and a limited-participation model. In these models, monetary policy is made by a benevolent policymaker who cannot commit to future policies. The study defines and analyzes Markov equilibrium in these economies and shows that there is no time-inconsistency problem for a wide range of parameter values.

Suggested Citation

  • Stefania Albanesi & V. V. Chari & Lawrence J. Christiano, 2003. "How severe is the time-inconsistency problem in monetary policy?," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 27(Sum), pages 17-33.
    • Handle: RePEc:fip:fedmqr:y:2003:i:sum:p:17-33:n:v.27no.3
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    1. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
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    4. Nicolini, Juan Pablo, 1998. "More on the time consistency of monetary policy," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 333-350, April.
    5. Ireland, Peter N., 1997. "Sustainable monetary policies," Journal of Economic Dynamics and Control, Elsevier, vol. 22(1), pages 87-108, November.
    6. Neiss, Katharine S, 1999. "Discretionary Inflation in a General Equilibrium Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 357-374, August.
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    Citations

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    Cited by:

    1. Kurozumi, Takushi, 2008. "Optimal sustainable monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1277-1289, October.
    2. Stefania Albanesi, "undated". "The Time Consistency of Optimal Monetary Policy with Heterogeneous Agents," Working Papers 207, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    3. Sousa, Pedro A. B. de, 2001. "Independent and Accountable Central Banks and the European Central Bank," European Integration online Papers (EIoP), European Community Studies Association Austria (ECSA-A), vol. 5, July.
    4. Siu, Henry E., 2008. "Time consistent monetary policy with endogenous price rigidity," Journal of Economic Theory, Elsevier, vol. 138(1), pages 184-210, January.
    5. Albanesi, Stefania, 2003. "Optimal and Time-Consistent Monetary and Fiscal Policy with Heterogeneous Agents," CEPR Discussion Papers 3713, C.E.P.R. Discussion Papers.
    6. Andrew Atkeson & Patrick J. Kehoe, 2001. "The advantage of transparent instruments of monetary policy," Working Papers 614, Federal Reserve Bank of Minneapolis.
    7. Bernd Hayo & Carsten Hefeker, 2001. "Do We Really Need Central Bank Independence? A Critical Re- examination," Macroeconomics 0103006, University Library of Munich, Germany.
    8. Andrew Atkeson & V. V. Chari & Patrick J. Kehoe, 2007. "On the Optimal Choice of a Monetary Policy Instrument," NBER Working Papers 13398, National Bureau of Economic Research, Inc.
    9. Bernd Hayo, 2003. "European monetary policy: Institutional design and policy experience," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 38(4), pages 209-218, July.
    10. Francesco Salsano, 2005. "Monetary Policy in the Presence Of Imperfect Observability Of The Objectives Of Central Bankers," Birkbeck Working Papers in Economics and Finance 0523, Birkbeck, Department of Economics, Mathematics & Statistics.
    11. David Arseneau, 2012. "Expectation traps in a new Keynesian open economy model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 49(1), pages 81-112, January.
    12. Tödter, Karl-Heinz, 2002. "Monetary indicators and policy rules in the P-star model," Discussion Paper Series 1: Economic Studies 2002,18, Deutsche Bundesbank.
    13. Liu, Xuan, 2013. "Time consistency of optimal monetary and fiscal policy in a small open economy," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 47-67.
    14. Leduc, Sylvain & Sill, Keith & Stark, Tom, 2007. "Self-fulfilling expectations and the inflation of the 1970s: Evidence from the Livingston Survey," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 433-459, March.
    15. Acocella Nicola & Di Bartolomeo Giovanni, 2007. "Towards a new theory of economic policy: Continuity and innovation," wp.comunite 0020, Department of Communication, University of Teramo.
    16. Tambakis Demosthenes N., 2009. "Optimal Monetary Policy with a Convex Phillips Curve," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-25, June.
    17. Lawrence J. Christiano & Massimo Rostagno, 2001. "Money Growth Monitoring and the Taylor Rule," NBER Working Papers 8539, National Bureau of Economic Research, Inc.
    18. Liu, X, 2010. "Is Optimal Monetary and Fiscal Policy in a Small Open Economy Time Consistent?," MPRA Paper 28781, University Library of Munich, Germany.
    19. Acocella, Nicola & Di Bartolomeo, Giovanni, 2008. "The Emerging New Theory of Economic Policy," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 61(2-3), pages 135-150.
    20. Aleksander Berentsen, "undated". "Time-Consistent Private Supplie of Outside Paper Money," IEW - Working Papers 156, Institute for Empirical Research in Economics - University of Zurich.
    21. Lawrence J. Christiano & Terry J. Fitzgerald, 2000. "Understanding the fiscal theory of the price level," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-38.
    22. David Miller, 2014. "Commitment versus Discretion in a Political Economy Model of Fiscal and Monetary Policy Interaction," 2014 Meeting Papers 80, Society for Economic Dynamics.
    23. Larry Christiano & Martin Eichenbaum, 1999. "The Research Agenda: Larry Christiano and Martin Eichenbaum write about their current research program on the monetary transmission mechanism," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 1(1), November.
    24. Andrew Atkeson & Patrick J. Kehoe, 2006. "The advantage of transparency in monetary policy instruments," Staff Report 297, Federal Reserve Bank of Minneapolis.
    25. Hayo, Bernd & Hefeker, Carsten, 2002. "Reconsidering central bank independence," European Journal of Political Economy, Elsevier, vol. 18(4), pages 653-674, November.

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    More about this item

    Keywords

    Monetary policy; Inflation (Finance); Money supply;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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