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Quarterly Review 2732

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How Severe is the Time-Inconsistency Problem in Monetary Policy?

Stefania Albanesi
V. V. Chari - Consultant
Lawrence J. Christiano - Consultant

Summer 2003

Abstract
This study analyzes two monetary economies, a cash-credit good model and a limited-participation model. In these models, monetary policy is made by a benevolent policymaker who cannot commit to future policies. The study defines and analyzes Markov equilibrium in these economies and shows that there is no time-inconsistency problem for a wide range of parameter values. The study originally appeared in a book, Advances in Economics and Econometrics: Theory and Applications © 2003 by Cambridge University Press.

Reprinted From: Advances in economics and econometrics: Theory and applications (Vol. 3, 2003, pp. 123-150)

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