Time-Consistent Policy and Persistent Changes in Inflation
This paper presents a model of dynamically consistent monetary policy that explains changes in inflation over time. In the model -- as in the postwar United States -- adverse supply shocks trigger persistent increases in inflation, and disinflation occurs when a tough policymaker creates a recession. The paper also proposes an approach to selecting a unique, plausible equilibrium in infinite-horizon models of monetary policy.
Published: Journal of Monetary Economics, Vol. 36, no. 2 (November 1995): 329-350.
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