Does the time inconsistency problem make flexible exchange rates look worse than you think?
Roc Armenter () and
No 230, Staff Reports from Federal Reserve Bank of New York
Lack of commitment in monetary policy leads to the well known Barro-Gordon inflation bias. In this paper, we argue that two phenomena associated with the time inconsistency problem have been overlooked in the exchange rate debate. We show that, absent commitment, independent monetary policy can also induce expectation traps-that is, welfare-ranked multiple equilibria-and perverse policy responses to real shocks-that is, an equilibrium policy response that is welfare inferior to policy inaction. Both possibilities imply higher macroeconomic volatility under flexible exchange rates than under fixed exchange rates.
Keywords: Foreign exchange rates; Equilibrium (Economics); Monetary policy (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn, nep-knm, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (5) Track citations by RSS feed
Downloads: (external link)
Working Paper: Does the time inconsistency problem make flexible exchange rates look worse than you think? (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:fip:fednsr:230
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Staff Reports from Federal Reserve Bank of New York Contact information at EDIRC.
Bibliographic data for series maintained by Amy Farber ().