How Severe is the Time Inconsistency Problem in Monetary Policy?

38 Pages Posted: 26 Feb 2001  

Stefania Albanesi

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)

Date Written: February 2001

Abstract

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.

Suggested Citation

Albanesi, Stefania and Chari, Varadarajan V. and Christiano, Lawrence J., How Severe is the Time Inconsistency Problem in Monetary Policy? (February 2001). NBER Working Paper No. w8139. Available at SSRN: https://ssrn.com/abstract=261264

Stefania Albanesi (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

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HOME PAGE: http://www.columbia.edu/~sa2310/

National Bureau of Economic Research (NBER)

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Varadarajan V. Chari

University of Minnesota - Twin Cities - Department of Economics ( email )

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Federal Reserve Bank of Minneapolis ( email )

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National Bureau of Economic Research (NBER)

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Lawrence J. Christiano

Northwestern University ( email )

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Federal Reserve Bank of Cleveland

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Federal Reserve Bank of Chicago

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Federal Reserve Bank of Minneapolis

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National Bureau of Economic Research (NBER)

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