Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/30187
Authors: 
Totzek, Alexander
Wohltmann, Hans-Werner
Year of Publication: 
2010
Series/Report no.: 
Economics working paper / Christian-Albrechts-Universität Kiel, Department of Economics 2010,04
Abstract: 
The aim of this paper is to solve the inconsistency problem à 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.
Subjects: 
Optimal monetary policy
New Keynesian macroeconomics
Reputational equilibria
time-consistent simple rules
JEL: 
A20
E52
E58
Document Type: 
Working Paper

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