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Barro-Gordon Revisited: Reputational Equilibria in a New Keynesian Model

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Wohltmann, H., Totzek, A. Barro-Gordon Revisited: Reputational Equilibria in a New Keynesian Model. Credit and Capital Markets – Kredit und Kapital, 45(1), 27-50. https://doi.org/10.3790/kuk.45.1.27
Wohltmann, Hans-Werner and Totzek, Alexander "Barro-Gordon Revisited: Reputational Equilibria in a New Keynesian Model" Credit and Capital Markets – Kredit und Kapital 45.1, 2012, 27-50. https://doi.org/10.3790/kuk.45.1.27
Wohltmann, Hans-Werner/Totzek, Alexander (2012): Barro-Gordon Revisited: Reputational Equilibria in a New Keynesian Model, in: Credit and Capital Markets – Kredit und Kapital, vol. 45, iss. 1, 27-50, [online] https://doi.org/10.3790/kuk.45.1.27

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Barro-Gordon Revisited: Reputational Equilibria in a New Keynesian Model

Wohltmann, Hans-Werner | Totzek, Alexander

Credit and Capital Markets – Kredit und Kapital, Vol. 45 (2012), Iss. 1 : pp. 27–50

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Prof. Dr. Hans-Werner Wohltmann, Christian-Albrechts-Universität zu Kiel, Institut für Volkswirtschaftslehre, Olshausenstraße 40, D-24118 Kiel

Dr. Alexander Totzek, Christian-Albrechts-Universität zu Kiel, Institut für Volkswirtschaftslehre, Olshausenstraße 40, D-24118 Kiel

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)