Skip to:
  1. Main navigation
  2. Main content
  3. Footer
Working Paper

Expectations, Credibility, and Time-Consistent Monetary Policy

Download pdf
This paper addresses the problem of multiple equilibria in a model of time-consistent monetary policy. It suggests that this problem originates in the assumption that agents have rational expectations and proposes several alternative restrictions on expectations that allow the monetary authority to build credibility for a disinflationary policy by demonstrating that it will stick to that policy even if it imposes short-run costs on the economy. Starting with these restrictions, the paper derives conditions that guarantee the uniqueness of the model’s steady state; monetary policy in this unique steady state involves the constant deflation advocated by Milton Friedman.
09.01.1998ISSN 2573-7953 WP 98-12DOI 10.26509/frbc-wp-199812

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Ireland, Peter. 1998. “Expectations, Credibility, and Time-Consistent Monetary Policy.” Federal Reserve Bank of Cleveland, Working Paper No. 98-12. https://doi.org/10.26509/frbc-wp-199812