Abstract
Why is inflation persistently high in some periods and low in others? The reason may be the absence of commitment in monetary policy. In a standard model, absence of commitment leads to multiple equilibria, or expectation traps, even without trigger strategies. In these traps, expectations of high or low inflation lead the public to take defensive actions, which then make accommodating those expectations the optimal monetary policy. Under commitment, the equilibrium is unique and the inflation rate is low on average. This analysis suggests that institutions which promote commitment can prevent high inflation episodes from recurring.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 715-741 |
| Number of pages | 27 |
| Journal | Review of Economic Studies |
| Volume | 70 |
| Issue number | 4 |
| DOIs | |
| State | Published - Oct 2003 |
Bibliographical note
Funding Information:Acknowledgements. We thank three anonymous referees and Orazio Attanasio for useful comments. We are particularly grateful to Michael Woodford for detailed comments that substantially improved our work. Chari and Christiano thank the National Science Foundation for support. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Banks of Chicago, Cleveland or Minneapolis or the Federal Reserve System.
