The time inconsistency of monetary policy with inflation persistence

Working paper

In a monetary policy model incorporating partial persistence in inflation it is shown that inflation bias is reduced and the response to shocks improved if the policy maker has a discount rate lower than its true social value. Thus a patient central banker is shown to be a third mechanism for offsetting time inconsistency problems in addition to Rogoff's conservative central banker and the principal-agent approach of Walsh. The paper also analyses outcomes under the latter regimes and the optimal rule, finding important differences from the results of earlier literature that excludes inflation persistence.

Authors: Mash, R

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Publication date: 2000-07-01
• Paper number: 15
• Keywords: inflation persistence; time inconsistency; monetary policy