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Chapter 16 Monetary Institution And Strategies

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Louisiana State University
ECON 2035

Chapter 16Monetary Institution and Strategies 161 Time Consistency and Inflation Inflation rate changes depends partly on expectationseShown through Philips curve ao2 types of expectations Adaptive expectations expectations based on past values Rational expectations expectations that are based on the nest possible forecast using all variable information Timeconsistency problem situation in which someone has incentives to make a promise but later renege on it because of these incentives others dont believe the promiseProblem of monetary policy through the Philips curve oCentral bank promise a lower inflation rate it has an incentive to capture the benefits of increased outputpublic will DECREASE their expectations for the inflation rateinflation rate will remain HIGH Solutions to TimeConsistency problemoConservative policymaker central bank official who believes it is more important to keep inflation low than to stimulate output oConservation policymaker policymaker who put more preference on a lower inflation rate compared to increasing outputSelect to run monetary policyheshe is more likely not to break a low inflation rate promise by increasing output Even if policymaker is not conservative policymakerpolicymaker would like the public to think otherwiseReputations less likely to INCREASE output because they dont want to lose their reputation Policy rules Gov can just mandate through passing a law that the central bank must follow a policy rule to keep a low inflation rate 162 Central Bank Independence Federal Reserve is o
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