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Monetary rules as optimal incentive strategies
Author(s)
Date Issued
1990
ISBN
9780080375380
Citation
In Dynamic modelling and control of national economies 1989, selected papers from the 6th IFAC symposium, pp. 61-67.
Type
Conference Paper
Abstract
In a Stackelberg Incentive Model, a monetary rule in the form of an incentive function is derived as an optimal strategy. A Stackelberg Incentive Equilibrium is solved for the widely used Barro-Gordon unemployment-inflation game. A dynamic version of the model is also considered. An equilibrium incentive strategy (a monetary rule) that leads to a team optimal solution of zero expected inflation and zero actual inflation is obtained. Providing a formal game equilibrium foundation for monetary rules may:
(i)
remove the policymaker's incentive to deviate from the rule, and
(ii)
incite private agents to perceive monetary rules as credible policies.
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