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How Severe is the Time-Inconsistency Problem in Monetary Policy?

Quarterly Review 2732 | Summer 2003

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How Severe is the Time-Inconsistency Problem in Monetary Policy?

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.


This study is reprinted, with the permission of the Cambridge University Press, from the book, _Advances in Economics and Econometrics: Theory and Applications_, Eighth World Congress of the Econometric Society, Volume 3, edited by Mathias Dewatripont, Lars Peter Hansen, and Stephen J. Turnovsky, pp. 123-50 (Chapter 4), Cambridge, U.K.: Cambridge University Press, 2003. © 2003 Cambridge University Press. The study was edited for publication in the _Federal Reserve Bank of Minneapolis Quarterly Review_.