Time inconsistency in a model with lags, persistence, and overlapping wage contracts

The two strands in the literature of monetary analysis, namelythat there are long lags of monetary policy and the adverseeffects of time inconsistency, have not previously been, butneed to be, integrated. To achieve such an objective, in thispaper we present a model of a Central Bank game with the realisticfeatures of both lags and persistence effects naturally imbeddedin overlapping wage contracts. In our more realistic model,the inflationary bias is much smaller, inflation is less volatile,and the optimal adjustment of monetary instrument needs to besmoother than previously assessed.