Hostname: page-component-cd9895bd7-gvvz8 Total loading time: 0 Render date: 2024-12-27T06:17:31.293Z Has data issue: false hasContentIssue false
  • English
  • Français

ESCAPE DYNAMICS AND POLICY SPECIFICATION

Published online by Cambridge University Press:  31 May 2011

Michele Berardi
Michele Berardi*
Affiliation:
University of Manchester
*
Address correspondence to: Michele Berardi, Economics DA, Arthur Lewis Building, The University of Manchester, M13 9PL, Manchester, UK; e-mail: michele.berardi@manchester.ac.uk.
Get access Rights & Permissions [Opens in a new window]

Abstract

In his monograph The Conquest of American Inflation (Princeton, NJ: Princeton University Press, 1999), Sargent suggests that the sharp reduction in U.S. inflation that took place under Volker may vindicate the type of econometric policy evaluation famously criticized by Lucas (Carnegie–Rochester Conference Series on Public Policy, 19–46, 1976). At the core of this vindication story is the escape dynamics, recurrent sliding away from the path leading to the time-consistent suboptimal equilibrium level of inflation and toward the low-inflation, optimal, time-inconsistent Ramsey outcome: by recurrently estimating a reduced-form model, in fact, the policy maker could periodically learn an approximate version of the natural rate hypothesis and therefore be induced to disinflate the economy. Two elements seem important in this story: the type of model used by the policy maker to represent the economy, whether structural or reduced-form, and the policy specification, whether derived taking the private sector's expectations as given or as endogenous to the policy design. Although Sargent (1999) stresses the first element, we find that it is instead the second aspect that is crucial to generate recurrent periods of low inflation: the policy maker has to recognize the endogeneity of the private sector's expectations and refrain from exploiting ephemeral short-run trade-offs between inflation and unemployment.

Keywords

Escape DynamicsPolicy RuleExpectationsLearning
Type
Articles
Information
Macroeconomic Dynamics , Volume 17 , Issue 1 , January 2013 , pp. 123 - 142
Copyright
Copyright © Cambridge University Press 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Beck, Gunter W. and Wieland, Volker (2002) Learning and control in a changing economic environment. Journal of Economic Dynamics and Control 26, 1359–1377.CrossRefGoogle Scholar
Cho, In-Koo, Williams, Noah, and Sargent, Thomas J. (2002) Escaping Nash inflation. Review of Economic Studies 69, 1–40.CrossRefGoogle Scholar
Evans, George W. and Honkapohja, Seppo (2001) Learning and Expectations in Macroeconomics. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Evans, George W. and Ramey, Garey (2006) Adaptive expectations, underparametrization and the Lucas critique. Journal of Monetary Economics 53, 249–264.CrossRefGoogle Scholar
Friedman, Benjamin (1979) Optimal expectations and the extreme information assumption of “rational expectations” macromodels. Journal of Monetary Economics 5, 23–41.CrossRefGoogle Scholar
Gerali, Andrea and Lippi, Francesco (2002) On the “Conquest” of Inflation. Temi di discussione del Servizio Studi della Banca d'Italia, 444.Google Scholar
Ireland, Peter N. (1999) Does the time-consistency problem explain the behavior of inflation in the United States? Journal of Monetary Economics 44, 279–291.CrossRefGoogle Scholar
Kendrick, David A. (2002) Stochastic Control for Economic Models. Version 2.00, online.Google Scholar
Kreps, D. (1998) Anticipated utility and dynamic choice. In Jacobs, D. P., Kalai, E., and Kamien, M. (eds.), Frontiers of Research in Economic Theory, pp. 242–274. Cambridge, UK: Cambridge University Press.CrossRefGoogle Scholar
Kydland, Finn and Prescott, Edward C. (1977) Rules rather than discretion: The inconsistency of optimal plans. Journal of Political Economy 85, 473–491.CrossRefGoogle Scholar
Lucas, Robert E. (1976) Econometric policy evaluation: A critique. Carnegie–Rochester Conference Series on Public Policy, 19–46.CrossRefGoogle Scholar
Marschak, Jacob (1953) Economic measurements for policy and prediction. In Hood, William C. and Koopmans, Tjalling G. (eds.), Studies in Econometric Methods, Cowles Comission Monograph 14, pp. 1–26. New York: Wiley.Google Scholar
McCallum, Bennett T. (1997) Crucial issues concerning central bank independence. Journal of Monetary Economics 39, 99–112.CrossRefGoogle Scholar
McCallum, Bennett T. (1999) Role of the minimal state variable criterion in rational expectations models. International Tax and Public Finance 6, 621–639.CrossRefGoogle Scholar
Sargent, Thomas J. (1999) The Conquest of American Inflation. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Sims, Christopher A. (1988) Projecting Policy Effects with Statistical Models. Paper prepared for the Latin American Meetings of the Econometric Society, San Jose, Costa Rica, August 1988.Google Scholar
Taylor, John B. (1996) How Should Monetary Policy Respond to Shocks While Maintaining Long-Run Price Stability?—Conceptual Issues. In Proceeding of the 1996 Symposium Achieving Price Stability, sponsored by the Federal Reserve Bank of Kansas City.Google Scholar