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Christian-Albrechts-Universität zu Kiel

Institut fr Volkswirtschaftslehre - Department of Economics
Economics Working Papers

Economics Working Papers: Abstract 2010-04




Alexander Totzek, Hans-Werner Wohltmann




Barro-Gordon revisited: Reputational equilibria in a New Keynesian Model
Abstract The aim of this paper is to solve the inconsistency problem la Barro and Gordon within a New Keynesian model and to derive time-consistent (stable) interest rate rules of Taylor-type. We find a multiplicity of stable rules. In contrast to the 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. We moreover show that under a standard calibration, the standard Taylor rule is stable in the case of a cost-push shock as well as under simultaneous supply and demand shocks.

Keywords: Optimal monetary policy, New Keynesian macroeconomics, Reputational equilibria, time-consistent simple rules

JEL classification: A20, E52, E58




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