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Time-Consistent Monetary Policy under Output Persistence

Manfred Grtner
Public Choice
Vol. 92, No. 3/4 (1997), pp. 429-437
Published by: Springer
Stable URL: http://www.jstor.org/stable/30024271
Page Count: 9
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Time-Consistent Monetary Policy under Output Persistence
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Abstract

This note merges the fact that real activity is persistent with a Barro-Gordon type model of endogenous monetary policy. It shows that persistence crucially affects policy choices. This applies in non-cooperative games with a finite horizon, and in games with an infinite horizon. Always, enforceable inflation announcements move higher when output persistence increases. Policymakers who discount future utility by 10% annually produce about ten times as much inflation under near-hysteresis as in a natural-rate scenario. A change in the policymaker's time preference may affect inflation both ways, depending on present time preference and persistence.

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