Time-consistent Monetary Policy Rules

Gerhard Sorger

No 442, Working Papers from Queen Mary University of London, School of Economics and Finance

Abstract: A monetary policy rule is a function mapping any given output level of the economy to a corresponding rate of inflation. Such a rule is time-consistent if the central bank has no incentive to deviate from it. Within a simple dynamic model combining an output-inflation trade-off with rational private-sector expectations we study existence and properties of time-consistent monetary policy rules. It is shown that such rules exist only if (i) the central bank gives relatively high weight to price stability and relatively low weight to output stabilization and if (ii) the random shocks to the economy are not too strong. If time-consistent monetary policy rules exist, they are generically non-unique.

Keywords: Monetary policy; Time-consistency; Policy rules; Inflation (search for similar items in EconPapers)
JEL-codes: E52 E61 (search for similar items in EconPapers)
Date: 2001-10-01
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Persistent link: https://EconPapers.repec.org/RePEc:qmw:qmwecw:442

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