Barro-Gordon revisited: reputational equilibria in a New Keynesian model

Alexander Totzek and Hans-Werner Wohltmann

No 2010-04, Economics Working Papers from Christian-Albrechts-University of Kiel, Department of Economics

Abstract: The aim of this paper is to solve the inconsistency problem à la Barro and Gordon within a New Keynesian model and to derive time-consistent (stable) interest rate rules of Taylor-type. We find a multiplicity of stable rules. In contrast to the Kydland/Prescott-Barro/Gordon approach, implementing a monetary rule where the cost and benefit resulting from inconsistent policy coincide - which implies a net gain of inconsistent policy behavior equal to zero - is not optimal. Instead, the solution can be improved by moving into the time-consistent area where the net gain of inconsistent policy is negative. We moreover show that under a standard calibration, the standard Taylor rule is stable in the case of a cost-push shock as well as under simultaneous supply and demand shocks.

Keywords: Optimal monetary policy; New Keynesian macroeconomics; Reputational equilibria; time-consistent simple rules (search for similar items in EconPapers)
JEL-codes: A20 E52 E58 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-cba and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cauewp:201004

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