A Generic Model of Monetary Policy, Inflation, and Reputation

Herschel I. Grossman

NBER Working Paper No. 2239 (Also Reprint No. r1442)
Issued in August 1990
NBER Program(s):   ME   EFG

This paper analyzes a reputational equilibrium for inflation under the generic assumption that monetary policy reflects proximate preferences for low expected inflation and positive unexpected inflation. The paper stresses the qualitative implication that in a reputational equilibrium the policymaker behaves as if it is concerned about controlling inflation, even though it does not have a direct preference for a low actual inflation rate. The analysis also shows how the sovereign's prospects for survival and the private agents' memory process play critical roles in determining whether the reputational equilibrium approximates a hypothetical equilibrium with binding commitments.

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Published: "Inflation and Reputation with Generic Policy Preferences." From Journal of Money, Credit and Banking, Vol. 22, No. 2, pp. 165-177, (May 1990).

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