Year: 2012
Author: Wohltmann, Hans-Werner, Totzek, Alexander
Credit and Capital Markets – Kredit und Kapital, Vol. 45 (2012), Iss. 1 : pp. 27–50
Abstract
Barro-Gordon Revisited: Reputational Equilibria in a New Keynesian Model
The aim of this paper is to solve the inconsistency problem à la Barro/Gordon within a New Keynesian model and to derive time-consistent interest rate rules of Taylor-type. We find a multiplicity of time-consistent rules. In contrast to the famous Kydland/Prescott-Barro/Gordon approach, implementing a monetary rule where the cost and benefit resulting from inconsistent policy coincide – which implies a net gain of inconsistent policy behavior equal to zero – is not optimal. Instead, the solution can be improved by moving into the time-consistent area where the net gain of inconsistent policy is negative. When additionally considering a cost-push shock, the area of time-consistent simple rules of Taylor type becomes graphically smaller. Finally, we find that numerous estimated Taylor rules are time-inconsistent since the empirically observed coefficient on inflation is too low. (JEL E52, E58, E30)
Journal Article Details
Publisher Name: Global Science Press
Language: English
DOI: https://doi.org/10.3790/kuk.45.1.27
Credit and Capital Markets – Kredit und Kapital, Vol. 45 (2012), Iss. 1 : pp. 27–50
Published online: 2012-01
AMS Subject Headings: Duncker & Humblot
Copyright: COPYRIGHT: © Global Science Press
Pages: 24