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Government policy and credibility: a criticism of a class of rational expectations models

Whittaker, John and Walker, Paul E (1997) Government policy and credibility: a criticism of a class of rational expectations models. Working Paper. The Department of Economics, Lancaster.

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Abstract

This paper challenges the logical consistency of the Barro and Gordon (1983) type of model of policy credibility, in which agents have 'trigger strategy' expectations of policy. It is shown that optimal policy is to 'cheat' by announcing low inflation whilst pursuing high inflation. This implies that the trigger mechanism is incompatible with rational expectations and there are no equilibria that simultaneously satisfy all the model assumptions. Finally, following a review of rational expectations models, it is suggested that policy credibility can be adequately described by a model in which expectations are adaptive, without regard for whether they are also rational.

Item Type: Monograph (Working Paper)
Subjects: UNSPECIFIED
Departments: Lancaster University Management School > Economics
ID Code: 51972
Deposited By: ep_importer_pure
Deposited On: 09 Dec 2011 14:27
Refereed?: No
Published?: Published
Last Modified: 10 Apr 2014 02:42
Identification Number:
URI: http://eprints.lancs.ac.uk/id/eprint/51972

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