Expectation Traps and Discretion

V. V. Chari, Lawrence J. Christiano, Martin Eichenbaum

Research output: Contribution to journalArticlepeer-review

58 Scopus citations

Abstract

We develop a dynamic model with optimizing private agents and a benevolent, optimizing monetary authority that cannot commit to future policies. We characterize the set of sustainable equilibria and discuss the implications for institutional reform. We show that there are equilibria in which the monetary authority pursues inflationary policies because that is what private agents expect. We call such equilibria expectation traps. Alternative institutional arrangements for the conduct of monetary policy which impose limited forms of commitment on the policymaker can eliminate expectation traps.Journal of Economic LiteratureClassification Numbers: E31, E42, E50, E51, E58.

Original languageEnglish (US)
Pages (from-to)462-492
Number of pages31
JournalJournal of Economic Theory
Volume81
Issue number2
DOIs
StatePublished - Aug 1998

Bibliographical note

Funding Information:
* We are grateful for comments from Bradford DeLong, Bennett McCallum, Michael Woodford, Michelle Zaharchuk and an associate editor. The authors thank the National Science Foundation for financial support. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis, the Federal Reserve Bank of Chicago, or the Federal Reserve System.

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