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Reputational Constraints on Monetary Policy

Kenneth Rogoff ()

No 1986, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Recent advances in game theory have made it possible to study monetary policy credibility in a structured fashion. Some have concluded from these models that reputational considerations substantially discourage the monetary authorities from ever attempting surprise inflations. Hence legal constraints on money supply growth are unnecessary and can only be harmful. In this study, I critically assess a number of alternative models of monetary policy reputation, including some new variants. The bulk of the paper is concerned with comparing specific details of these models. One general conclusion is that although this first generation of monetary policy reputation models yields a significant number of important insights, it is premature to argue that time consistency is not a major issue in the design of monetary policy institutions. The main problem is that the models either yield a multiplicity of equilibria, or/and yield conclusions which are very sensitive to apparently minor changes in the information structure. Whereas an optimal reputational equilibrium may arise without any explicit cooperation among atomistic private agents, it is not (yet) clear why we should expect them to coordinate on the most favorable equilibrium. Strategic uncertainty may be an important drawback to institutional setups which place few constraints on monetary policy.

Date: 1986-07
Note: EFG
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Published as Rogoff, Kenneth. "Reputational Constratints on Monetary Policy." Carnegie-Rochester Conference Series on Public Policy, ed. by Karl Brunner and Allen Meltzer, Vol. 26, Spring 1987, pp. 141-182. American Economic Review, vol. 80, no. 1, pp 21-36, March 1990.

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