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