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Macroeconomic policy games with incomplete information : Some extensions

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  • Driffill, E.J.

    (Tilburg University, School of Economics and Management)

Abstract

In several recent papers macroeconomic policy has been modelled in the context of a game of incomplete information. A central result of the work by Backus and Driffill and by Barro is that the uncertainty may provide an incentive for the government to maintain a socially efficient policy of zero inflation for most of the game, without any formal precommitment, thereby avoiding the inflationary bias which would be associated with discretionary policy. This paper extends this analysis in two ways. First, it considers a model in which the uncertainty about the government's preferences is somewhat more broadly specified. Second, it considers a model in which some exogenous random shocks impinge on the economy and not only prevent the government from exercising perfect control but also prevent the private sector of the economy from observing exactly the policy measures taken by the government. The analysis of the more general model of uncertainty about preferences supports the results of Backus and Driffill and of Barro, in that the uncertainty induces low or zero inflation outcomes in the sequential equilibrium of the game. It also reconciles their results with those of Vickers who obtained a separating rather than a pooling equilibrium from a model with a very similar structure. The analysis of the model with random shocks indicates tentatively that the signal extraction problem faced by private sector agents as a result of the shocks reduces substantially the discipline on policy-makers which reputational considerations would otherwise impose.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Driffill, E.J., 1990. "Macroeconomic policy games with incomplete information : Some extensions," Other publications TiSEM a4a8fd97-0e79-4e5c-bd14-1, Tilburg University, School of Economics and Management.
  • Handle: RePEc:tiu:tiutis:a4a8fd97-0e79-4e5c-bd14-11b7640511ab
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    References listed on IDEAS

    as
    1. Barro, Robert J., 1986. "Reputation in a model of monetary policy with incomplete information," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 3-20, January.
    2. Rogoff, Kenneth, 1987. "Reputational constraints on monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 26(1), pages 141-181, January.
    3. Backus, David & Driffill, John, 1985. "Inflation and Reputation," American Economic Review, American Economic Association, vol. 75(3), pages 530-538, June.
    4. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, vol. 54(5), pages 1099-1128, September.
    5. David Backus & John Driffill, 1985. "Rational Expectations and Policy Credibility Following a Change in Regime," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(2), pages 211-221.
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    Cited by:

    1. Driffill, John, 1988. "Macroeconomic policy games with incomplete information : A survey," European Economic Review, Elsevier, vol. 32(2-3), pages 533-541, March.
    2. Juan Ayuso Huertas, 1991. "Los efectos del anuncio de un objetivo de inflación," Investigaciones Economicas, Fundación SEPI, vol. 15(3), pages 627-644, September.
    3. 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.

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