This paper derives the restrictions imposed by barro and gordon s theory of timeconsistent monetary policy on a bivariate timeseries model for inflation and unemployment and tests those. It is also called as birdinthehand theory that states that the current dividends are important in determining the value of the firm. Setup of the model as in previous models barro and gordon 1983a, b, costs for period t depend on actual and unexpected inflation, where v is actual inflation for period t and 7r, is the representative persons forecast of. In a discretionary regime the monetary authority can print more money and create more inflation than people expect. It has to be unexpected, otherwise people would anticipate it and there would be only nominal, not real, effects. A positive theory of monetary policy in a naturalrate model. Using quarterly and annual canadian data, i test the restrictions imposed by barro and gordon s theory of timeconsistent monetary policy on a bivariate timeseries model for inflation and unemployment. The attractions of generating revenue from surprise inflation are clear if we. Rules, discretion and reputation in a model of monetary policy. A linearized, reducedform version of the model predicts that inflation depends on expected unemployment as in the barrogordon model and the conditional variance of unemployment. The barrogordon theoretical account depicted the picks policy shapers face when making pecuniary policy. In contrast to barro and gordon 1983a we show that the lowinflationary state can be realized as a nashequilibrium in our model and in contrast to barro and gordon 1983b we do not rely on punishment strategies, therefore addressing the concerns on credible punishment raised by alnowaihi and levine.
Macroeconomics 1880 1900 1920 1940 1960 1980 2000 matthiasdoepke universityofchicago andreaslehnert boardofgovernorsofthe federalreservesystem andreww. The present paper tests the validity of this model in the. Using quarterly and annual canadian data, i test the restrictions imposed by barro and gordons theory of timeconsistent monetary policy on. Does the barrogordon model explain the behavior of us. Gordon, rules, discretion and reputation in monetnry pjiry 103. Recession aversion, output and the kydlandprescott barrogordon model by stefan gerlach hong kong monetary authority hong kong institute for monetary research university of basel and the cepr june 2003 abstract this paper explores the relationship between the kydlandprescott barrogordon model and models with asymmetric policy preferences. Costs are assumed to rise, and at an increasing rate, with the realized inflation.
Your answer should draw on the theoretical models of monetary policy we have covered in lectures, and your knowledge of the monetary policy framework at the bank of england minimum 950. In this model, it is assumed that a nation will attempt to keep the unemployment rate below its natural level. To that end, it constructs a general gametheoretical model with asymmetric preferences that nests the barrogordon model and a version of cukiermans model as special cases. Pdf a positive theory of monetary policy in a nature rate model.
It also holds unambiguously for output if the production function is cobbdouglas. Tractable rare disaster probability and optionspricing. Testing the barrogordon model in breaking and dependent panels. Taken from the barro gordon theoretical account of regulations vs. Interest rate rules, barrogordon model free download as powerpoint presentation. Rules, discretion and reputation in a model of monetary policy robert j. Mcmahon university of warwick july 29, 2014 this note outlines the barrogordon model of timeconsistent monetary policy, discussing the meaning of the equations and how to solve the model. Does the timeconsistency problem explain the behavior of. The gordon growth model is used to determine the intrinsic value of a stock based on a future series of dividends that grow at a constant rate. The barrogordon model detailed derivation nicola viegi university of pretoria 2012 this note gives a stepbystep derivation of the barrogordon model. This paper investigates whether the model proposed by barro and gordon could explain the behavior of inflation in canada. The barrogordon model of monetary policy implies that in. Gordons theory on dividend policy is one of the theories believing in the relevance of dividends concept.
Robert joseph barro born september 28, 1944 is an american classical macroeconomist and the paul m. A linearized, reducedform version of the model predicts that inflation depends on expected unemployment as in the barrogordon model and the conditional variance of. Rules, discretion and reputation in a model of monetary. The model is interesting because it illustrates in the simplest possible way the relationship between private sector expectations and the functioning of monetary policy. Stochastic reaction strategies in the barrogordon framework.
Mccleary holds a doctorate from the university of chicago and teaches at harvard. Basherz, david edgertonx october 12, 2005 abstract the barrogordon. However, relaxing this assumption in the linearquadratic framework of barro and gordon means that the inflation bias is zero and the model cannot explain. Rules, discretion and reputation in monetary policy barro and gordon 1983b. I also present a gametheoretic outline of what is going on in the model which may help some of you to understand the material.
The ones marked may be different from the article in the profile. Barro and gordon 1981 a positive theory of monetary policy in a natural rate model notes. Barrogordon model essay free case studies examples. Does the timeconsistency problem explain the behavior of in.
The second major element in our model is the cost of inflation. Barro gordon model to what extent is there a disconnect between theoretical models of monetary policy, and how monetary policy is conducted in the real world. This cited by count includes citations to the following articles in scholar. A linearized, reducedform version of the model predicts that inflation depends on expected unemployment as in the barro gordon model and the conditional variance of unemployment. The model is interesting because it illustrates in the simplest possible way the relationship.
Rules, discretion, and reputation in a model of monetary policy. A positive theory of monetary policy in a natural rate model. Inflationary bias is the outcome of discretionary monetary policy that leads to a higher than. Page 114 drazen governments choose expansionary policies in order to induce increased economic activity and reduce unemployment, but once this is recognized anticipated inflation will have no significant impact on equilibrium economic activity. The barrogordon model detailed derivation nicola viegi university of pretoria 2012 this note gives a stepbystep derivation of the barro gordon model.
Monetary policy in a natural rate model1 in the journal of political economy barro and. Government spending in a simple model of endogeneous growth. Explaining an inflation bias without using the word 0surprise1. Gordon makes extensive use of data, international examples, and case studies throughout, and the eleventh edition incorporates critical developments in the field. Timeconsistency can explain why politicians who realize this still succumb to the shortrun temptation to inflate in a vain attempt to induce such an. This model nests as special cases the barro gordon model and the version of cukiermans model examined by rugemurcia 2001. Mcmahon university of warwick july 29, 2014 this note outlines the barro gordon model of timeconsistent monetary policy, discussing the meaning of the equations and how to solve the model. Warburg professor of economics at harvard university.
Interest rate rules, barrogordon model central banks. Gordons theory on dividend policy focusing on relevance. Cahier 200207 does the barrogordon model explain the. Average in ation has no bene t because it is expected but increases loss. Gordon published the article 0a positive theory of. Pdf classical game theory addresses decision problems in multiagent environment where one rational agents decision affects other agents. Jan 16, 2008 in contrast to barro and gordon 1983a we show that the lowinflationary state can be realized as a nashequilibrium in our model and in contrast to barro and gordon 1983b we do not rely on punishment strategies, therefore addressing the concerns on credible punishment raised by alnowaihi and levine. Value of stock dps 1 r g where dps 1 expected dividends one year from now r required rate of return for equity investors g annual growth rate in dividends forever. Likelihood ratio tests indicate that the restriction imposed by the barrogordon model is rejected by the data but the one imposed by the version of cukiermans model is not. Recession aversion, output and the kydlandprescott barro gordon model by stefan gerlach hong kong monetary authority hong kong institute for monetary research university of basel and the cepr june 2003 abstract this paper explores the relationship between the kydlandprescott barro gordon model and models with asymmetric policy preferences. The barrogordon model shows how the ability of government to manipulate leads to inflationary bias. This paper tests the predictions of the barrogordon model using us data on inflation and unemployment. The problem becomes timeinconsistent with rational expectations and a multiperiod model. Does the barrogordon model explain the behaviour of.
However, the model has subsequently been dubbed the barro gordon model. Jennifer is a gastroenterologist in greenwich, connecticut. The framework consider the following preferences for two players u union and v central bank. Value of stock dps 1 r g where dps 1 expected dividends one year from now r required rate of return for equity investors g annual growth rate in dividends forever a basic premise. Macroeconomics is widely praised for its ability to present theory as a way of evaluating key macro questions, such as why some countries are rich and others are poor. Rules, discretion and reputation in a model of monetary policy 1. A reexamination of the empirical evidence francisco j.
The coronavirus and the great influenza epidemic lessons from the spanish flu for the coronaviruss potential effects on mortality and economic activity, cesifo working paper series 8166, cesifo group munich. To what extent is there a disconnect between theoretical models of monetary policy, and how monetary policy is conducted in the real world. Together they have made critical contributions to the field of religion and economics. We incorporate inferential expectations into the barrogordon model. Pdf naturalrate models suggest that the systematic parts of. Economic growth in a cross section of countries robert j. However, the model has subsequently been dubbed the barrogordon model. The inducement for policymakers to make surprise rising prices is shown below. Barro university of chicago and national bureau of economic research david b. A positive theory of monetary policy in a naturalrate model pdf. The barrogordon model depicted the choices policy makers face when. Barro gordon model giovanni di bartolomeo university of teramo 1. Comparison with original barrogordon comparing this model to the original barrogordon model reveals that the upper bound of the enforceable range. Gordon university of rochester a discretionary policymaker can create surprise inflation, which may reduce unemployment and raise government revenue.
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