In a discretionary regime the monetary authority can print more money and create more inflation than people expect. They callout for a more detailedanalysis that uses the barrogordon model as a basis for statistical tests of the hypothesis that the timeconsistency. Costs are assumed to rise, and at an increasing rate, with the realized inflation. Macroeconomics 1880 1900 1920 1940 1960 1980 2000 matthiasdoepke universityofchicago andreaslehnert boardofgovernorsofthe federalreservesystem andreww. This paper derives the restrictions imposed by barro and gordons theory of timeconsistent monetary policy on a bivariate timeseries model for inflation and unemployment and tests those. 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. Barro and gordon 1981 a positive theory of monetary policy in a natural rate model notes. Cahier 200207 does the barrogordon model explain the. The framework consider the following preferences for two players u union and v central bank. Testing the barrogordon model in breaking and dependent. Barrogordon model essay free case studies examples.
In this model, it is assumed that a nation will attempt to keep the unemployment rate below its natural level. 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. Rules, discretion and reputation in a model of monetary policy. It also holds unambiguously for output if the production function is cobbdouglas.
However, relaxing this assumption in the linearquadratic framework of barro and gordon means that the inflation bias is zero and the model cannot explain. However, the model has subsequently been dubbed the barro gordon model. 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. The barrogordon model shows how the ability of government to manipulate leads to inflationary bias. Economic growth in a cross section of countries robert j. The model is interesting because it illustrates in the simplest possible way the relationship between private sector expectations and the functioning of monetary policy. Government spending in a simple model of endogeneous growth. It has to be unexpected, otherwise people would anticipate it and there would be only nominal, not real, effects. 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. 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. This cited by count includes citations to the following articles in scholar. Comparison with original barrogordon comparing this model to the original barrogordon model reveals that the upper bound of the enforceable range. Together they have made critical contributions to the field of religion and economics.
The attractions of generating revenue from surprise inflation are clear if we. Monetary policy in a natural rate model1 in the journal of political economy barro and. 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. Barro and gordon 1983a modify the social objective function, making both the deviations of inflation and unemployment from target quadratic terms, whereas the implied model in kydland and prescott 1977 enters the deviation of unemployment from target as a linear, and not quadratic, term.
Timeconsistency can explain why politicians who realize this still succumb to the shortrun temptation to inflate in a vain attempt to induce such an. Robert joseph barro born september 28, 1944 is an american classical macroeconomist and the paul m. Average in ation has no bene t because it is expected but increases loss. A linearized, reducedform version of the model predicts that inflation depends on expected unemployment as in the barrogordon model and the conditional variance of. Recession aversion, output and the kydlandprescott barro. Rules, discretion and reputation in monetary policy barro and gordon 1983b. Barro gordon model giovanni di bartolomeo university of teramo 1.
Pdf naturalrate models suggest that the systematic parts of. The barrogordon model depicted the choices policy makers face when. 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. The inducement for policymakers to make surprise rising prices is shown below. A positive theory of monetary policy in a naturalrate model pdf. Gordon university of rochester a discretionary policymaker can create surprise inflation, which may reduce unemployment and raise government revenue. The barrogordon theoretical account depicted the picks policy shapers face when making pecuniary policy. Explaining an inflation bias without using the word 0surprise1. Gordon, rules, discretion and reputation in monetnry pjiry 103. 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. Rules, discretion and reputation in a model of monetary. Testing the barrogordon model in breaking and dependent panels. Inflationary bias is the outcome of discretionary monetary policy that leads to a higher than. Rules, discretion and reputation in a model of monetary policy 1.
The barrogordon model detailed derivation nicola viegi university of pretoria 2012 this note gives a stepbystep derivation of the barro gordon model. This model nests as special cases the barrogordon model and the version of cukiermans model examined by rugemurcia 2001. We incorporate inferential expectations into the barrogordon model. Taken from the barro gordon theoretical account of regulations vs. Does the barrogordon model explain the behavior of us. Interest rate rules, barrogordon model central banks. A positive theory of monetary policy in a naturalrate model. 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. Central bankers know that an unexpected increase in inflation will lower unemployment. 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. The present paper tests the validity of this model in the.
The model is interesting because it illustrates in the simplest possible way the relationship. 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. 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. Does the barrogordon model explain the behaviour of. Pdf a positive theory of monetary policy in a nature rate model. Rules, discretion, and reputation in a model of monetary policy.
Gordon published the article 0a positive theory of. This model nests as special cases the barro gordon model and the version of cukiermans model examined by rugemurcia 2001. A reexamination of the empirical evidence francisco j. Tractable rare disaster probability and optionspricing. 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.
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. A positive theory of monetary policy in a natural rate model. However, the model has subsequently been dubbed the barrogordon model. Basherz, david edgertonx october 12, 2005 abstract the barrogordon. It is also called as birdinthehand theory that states that the current dividends are important in determining the value of the firm. 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. 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. Interest rate rules, barrogordon model free download as powerpoint presentation. Gordon makes extensive use of data, international examples, and case studies throughout, and the eleventh edition incorporates critical developments in the field. 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. 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 barrogordon model detailed derivation nicola viegi university of pretoria 2012 this note gives a stepbystep derivation of the barrogordon model.
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. Pdf classical game theory addresses decision problems in multiagent environment where one rational agents decision affects other agents. Jennifer is a gastroenterologist in greenwich, connecticut. Warburg professor of economics at harvard university. Does the timeconsistency problem explain the behavior of. This paper tests the predictions of the barrogordon model using us data on inflation and unemployment. 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. 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. 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. Mccleary holds a doctorate from the university of chicago and teaches at harvard. Stochastic reaction strategies in the barrogordon framework. Using quarterly and annual canadian data, i test the restrictions imposed by barro and gordons theory of timeconsistent monetary policy on. Barro university of chicago and national bureau of economic research david b.
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