Expectation traps and monetary policy

Stefania Albanesi, Varadarajan Chari and Lawrence Christiano

No 319, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: Why is inflation persistently high in some periods and low in others? The reason may be absence of commitment in monetary policy. In a standard model, absence of commitment leads to multiple equilibria, or expectation traps, even without trigger strategies. In these traps, expectations of high or low inflation lead the public to take defensive actions, which then make accommodating those expectations the optimal monetary policy. Under commitment, the equilibrium is unique and the inflation rate is low on average. This analysis suggests that institutions which promote commitment can prevent high inflation episodes from recurring.

Keywords: Consumer behavior; Monetary policy; Inflation (Finance) (search for similar items in EconPapers)
Date: 2003
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (85)

Published in Review of Economic Studies> (Vol. 70, No. 4, October 2003, pp. 715-41)

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Related works:
Journal Article: Expectation Traps and Monetary Policy (2003)
Working Paper: Expectation traps and monetary policy (2002)
Working Paper: Expectation Traps and Monetary Policy (2002)
Working Paper: Expectation Traps and Monetary Policy (2002)
Working Paper: Expectation Traps and Monetary Policy
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