Reputational Constraints on Monetary Policy

Kenneth Rogoff

NBER Working Paper No. 1986 (Also Reprint No. r0906)
Issued in July 1986
NBER Program(s):Economic Fluctuations and Growth Program

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


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Document Object Identifier (DOI): 10.3386/w1986

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. citation courtesy of

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