Barro-Gordon revisited: reputational equilibria in a New Keynesian model

Arbeitspapier

The aim of this paper is to solve the inconsistency problem à la Barro and Gordon within a New Keynesian model and to derive time-consistent (stable) interest rate rules of Taylor-type. We find a multiplicity of stable rules. In contrast to the 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. We moreover show that under a standard calibration, the standard Taylor rule is stable in the case of a cost-push shock as well as under simultaneous supply and demand shocks.

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• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Economics Working Paper ; No. 2010-04

Classification and Topics

• Classification: Wirtschaft ; Economic Education and Teaching of Economics: General ; Monetary Policy ; Central Banks and Their Policies
• Subject: Optimal monetary policy ; New Keynesian macroeconomics ; Reputational equilibria ; time-consistent simple rules

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Totzek, Alexander ; Wohltmann, Hans-Werner
• Event: Veröffentlichung
• (who): Kiel University, Department of Economics
• (where): Kiel
• (when): 2010

Further information

• Handle: http://hdl.handle.net/10419/30187