Working Paper: NBER ID: w2239
Authors: Herschel I. Grossman
Abstract: This paper analyzes a reputational equilibrium for inflation under the generic assumption that monetary policy reflects proximate preferences for low expected inflation and positive unexpected inflation. The paper stresses the qualitative implication that in a reputational equilibrium the policymaker behaves as if it is concerned about controlling inflation, even though it does not have a direct preference for a low actual inflation rate. The analysis also shows how the sovereign's prospects for survival and the private agents' memory process play critical roles in determining whether the reputational equilibrium approximates a hypothetical equilibrium with binding commitments.
Keywords: Monetary Policy; Inflation; Reputation
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Policymaker's reputational considerations (D72) | Inflation outcomes (E31) |
| Sovereign's survival prospects (P27) | Policymaker's behavior (D72) |
| Memory of private agents (D82) | Policymaker's behavior (D72) |
| Policymaker's actions (D78) | Private agents' expectations (D84) |
| Private agents' expectations (D84) | Policymaker's future policy decisions (D78) |
| Equilibrium inflation rate (E31) | Policymaker's validation of expectations (D78) |