Time Inconsistency in a Model with Lags, Persistence, and Overlapping Wage Contracts

Charles A E Goodhart and Haizhou Huang ()

Oxford Economic Papers, 1998, vol. 50, issue 3, 378-96

Abstract: The two strands in the literature of monetary analysis, namely that there are long lags of monetary policy and the adverse effects of time inconsistency, have not previously been, but need to be, integrated. To achieve such an objective, in this paper, the authors present a model of a Central Bank game with the realistic features of both lags and persistence effects naturally imbedded in overlapping wage contracts. In their more realistic model, the inflationary bias is much smaller, inflation is less volatile, and the optimal adjustment of monetary instrument needs to be smoother than previously assessed. Copyright 1998 by Royal Economic Society.

Date: 1998
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