Delegation, time inconsistency and sustainable equilibrium
2009 (English)In: Journal of Economic Dynamics and Control, ISSN 0165-1889, Vol. 33, no 8, 1617-1629 p.Article in journal (Refereed) Published
This paper analyzes the effectiveness of delegation in solving the time inconsistency problem of monetary policy using a microfounded general equilibrium model where delegation and reappointment are explicitly included into the government's strategy. The method of Chari and Kehoe [1990. Sustainable plans. Journal of Political Economy 98 (4), 783–802] is applied to characterize the entire set of sustainable outcomes. Countering McCallum's [1995. Two fallacies concerning central-bank independence. American Economic Review 85 (2), 207–211] second fallacy, delegation is able to eliminate the time inconsistency problem, with the commitment policy being sustained under discretion for any intertemporal discount rate.
Place, publisher, year, edition, pages
2009. Vol. 33, no 8, 1617-1629 p.
Central bank, Monetary policy, Institutional design
Research subject Economics
IdentifiersURN: urn:nbn:se:uu:diva-132089DOI: 10.1016/j.jedc.2009.02.008ISI: 000267269500007OAI: oai:DiVA.org:uu-132089DiVA: diva2:356878