Working Paper: NBER ID: w1986
Authors: Kenneth Rogoff
Abstract: Recent advances in game theory have made it possible to \nstudy monetary policy credibility in a structured fashion. Some \nhave concluded from these models that reputational considerations \nsubstantially discourage the monetary authorities from ever \nattempting surprise inflations. Hence legal constraints on money \nsupply growth are unnecessary and can only be harmful. In this \nstudy, I critically assess a number of alternative models of \nmonetary policy reputation, including some new variants. The \nbulk of the paper is concerned with comparing specific details of \nthese models. One general conclusion is that although this first \ngeneration of monetary policy reputation models yields a \nsignificant number of important insights, it is premature to \nargue that time consistency is not a major issue in the design of \nmonetary policy institutions. The main problem is that the \nmodels either yield a multiplicity of equilibria, or/and yield \nconclusions which are very sensitive to apparently minor changes \nin the information structure. Whereas an optimal reputational \nequilibrium may arise without any explicit cooperation among \natomistic private agents, it is not (yet) clear why we should \nexpect them to coordinate on the most favorable equilibrium. \nStrategic uncertainty may be an important drawback to \ninstitutional setups which place few constraints on monetary \npolicy.
Keywords: monetary policy; reputation; credibility; game theory
JEL Codes: E52; E58; D82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reputational constraints (D82) | credibility of monetary policy (E52) |
| credibility of monetary policy (E52) | inflationary expectations (E31) |
| Reputational considerations (M14) | inflation rates (E31) |
| Public's expectations (D84) | optimal reputational equilibrium (C73) |