Expectation Traps and Monetary Policy

Stefania Albanesi (), Varadarajan Chari () and Lawrence Christiano ()

No 8912, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Why is it that inflation is persistently high in some periods and persistently low in other periods? We argue that lack of commitment in monetary policy may bear a large part of the blame. We show that, in a standard equilibrium model, absence of commitment leads to multiple equilibria, or expectation traps. In these traps, expectations of high or low inflation lead the public to take defensive actions which then make it optimal for the monetary authority to validate those expectations. We find support in cross-country evidence for key implications of the model.

JEL-codes: E5 E61 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mon
Date: 2002-04
Note: EFG ME
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Working Paper: Expectation traps and monetary policy (2002)
Working Paper: Expectation Traps and Monetary Policy (2002)
Working Paper: Expectation traps and monetary policy (2003)
Working Paper: Expectation Traps and Monetary Policy
Journal Article: Expectation Traps and Monetary Policy (2003)
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