How to avoid the consequences of anticipated monetary policies |
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Authors: | Hans Gersbach |
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Institution: | Alfred-Weber-Institut, Universit?t Heidelberg, Grabengasse 14, D-69117 Heidelberg, GERMANY, DE
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Abstract: | Summary. This paper analyzes how monetary policy in an overlapping generations model can be designed to avoid inflationary consequences
of anticipated changes of monetary policies. Avoiding these inflationary consequences will require a once and for all increase
(decrease) in monetary growth immediately before the policy switch takes place if the relative risk aversion is greater (less)
than unity. If the relative risk aversion is greater than unity, the avoidance of inflationary consequences is also time-consistent.
Moreover, a general monetary feedback rule ensures that the economy picks the steady state with the lowest inflation rate.
Our results suggest that the difference between unanticipated and anticipated policy switches may not be as important as generally
assumed, because the consequences of the latter can be neutralized.
Received: September 19, 1995; revised version: July 27, 1998 |
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Keywords: | and Phrases: Monetary policy design Inflation Anticipated policies Overlapping generation model Indeterminacy Feedback rules |
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