Recent advances in game theory have made it possible to
study monetary policy credibility in a structured fashion. Some
have concluded from these models that reputational considerations
substantially discourage the monetary authorities from ever
attempting surprise inflations. Hence legal constraints on money
supply growth are unnecessary and can only be harmful. In this
study, I critically assess a number of alternative models of
monetary policy reputation, including some new variants. The
bulk of the paper is concerned with comparing specific details of
these models. One general conclusion is that although this first
generation of monetary policy reputation models yields a
significant number of important insights, it is premature to
argue that time consistency is not a major issue in the design of
monetary policy institutions. The main problem is that the
models either yield a multiplicity of equilibria, or/and yield
conclusions which are very sensitive to apparently minor changes
in the information structure. Whereas an optimal reputational
equilibrium may arise without any explicit cooperation among
atomistic private agents, it is not (yet) clear why we should
expect them to coordinate on the most favorable equilibrium.
Strategic uncertainty may be an important drawback to
institutional setups which place few constraints on monetary
policy.
*Published:
Rogoff, Kenneth. "Reputational Constratints on Monetary Policy." Carnegie-Rochester Conference Series on Public Policy, ed. by Karl Brunner and Allen Meltzer, Vol. 26, Spring 1987, pp. 141-182. American Economic Review, vol. 80, no. 1, pp 21-36, March 1990.
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