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Quarterly Review 2732

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

V. V. Chari | Consultant
Lawrence J. Christiano | Consultant
Stefania Albanesi

Summer 2003

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. The study originally appeared in a book, Advances in Economics and Econometrics: Theory and Applications © 2003 by Cambridge University Press.

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