Expectation Traps and Monetary Policy

60 Pages Posted: 18 Apr 2003

See all articles by Stefania Albanesi

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)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2002

Abstract

Why is it that inflation is persistently high in some periods and persistently low in other periods? We argue that lack of commitment in monetary policy may bear a large part of the blame. We show that, in a standard equilibrium model, absence of commitment leads to multiple equilibria, or expectation traps. In these traps, expectations of high or low inflation lead the public to take defensive actions which then make it optimal for the monetary authority to validate those expectations. We find support in cross-country evidence for key implications of the model.

JEL Classification: E5, E61, E63

Suggested Citation

Albanesi, Stefania and Chari, Varadarajan V. and Christiano, Lawrence J., Expectation Traps and Monetary Policy (April 2002). FRB of Chicago Working Paper No. 2002-04. Available at SSRN: https://ssrn.com/abstract=316141 or http://dx.doi.org/10.2139/ssrn.316141

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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Centre for Economic Policy Research (CEPR)

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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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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

90 Hennepin Avenue
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National Bureau of Economic Research (NBER)

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United States

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