How Severe is the Time Inconsistency Problem in Monetary Policy?
Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
Varadarajan V. Chari
University of Minnesota - Twin Cities - Department of Economics; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)
Lawrence J. Christiano
Northwestern University; Federal Reserve Bank of Cleveland; Federal Reserve Bank of Chicago; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)
NBER Working Paper No. w8139
We analyze two monetary economies - a cash-credit good model and a limited participation model. In our models, monetary policy is made by a benevolent policymaker who cannot commit to future policies. We define and analyze Markov equilibrium in these economies. We show that there is no time inconsistency problem for a wide range of parameter values.
Number of Pages in PDF File: 38
Date posted: February 26, 2001