Working Paper: NBER ID: w7234
Authors: Peter N. Ireland
Abstract: This paper addresses the problem of multiple equilibria in a model of time-consistent monetary policy. It suggests that this problem originates in the assumption that agents have rational expectations and proposes several alternative restrictions on expectations that allow the monetary authority to build credibility for a disinflationary policy by demonstrating that it will stick to the policy even if it imposes short-run costs on the economy. Starting with these restrictions, the paper derives conditions that guarantee the uniqueness of the model's steady state; monetary policy in this unique steady state involves the constant deflation advocated by Milton Friedman.
Keywords: No keywords provided
JEL Codes: E31; E52; E61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rational expectations (D84) | multiple equilibria (D50) |
| alternative restrictions on expectations (D84) | monetary policy credibility (E52) |
| monetary policy credibility (E52) | unique steady state (C62) |
| unique steady state (C62) | constant deflationary policy (E31) |
| constant deflationary policy (E31) | long-term stability in expectations (D84) |
| constant deflationary policy (E31) | policy effectiveness (D78) |