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Creator: Siu, Henry E. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 390 Abstract:
I characterize time consistent equilibrium in an economy with price rigidity and an optimizing monetary authority operating under discretion. Firms have the option to increase their frequency of price change, at a cost, in response to higher inflation. Previous studies, which assume a constant degree of price rigidity across inflation regimes, find two time consistent equilibria—one with low inflation, the other with high inflation. In contrast, when price rigidity is endogenous, the high inflation equilibrium ceases to exist. Hence, time consistent equilibrium is unique. This result depends on two features of the analysis: (1) a plausible quantitative specification of the fixed cost of price change, and (2) the presence of an arbitrarily small cost of inflation that is independent of price rigidity.
Palavra-chave: Markov equilibrium, Expectation traps, Sticky prices, Multiple equilibria, Discretion, State dependent pricing, and Time consistency Sujeito: E31 - Price Level; Inflation; Deflation, E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems, and E52 - Monetary Policy
Creator: Kahn, James A. (James Allan) and Lim, Jong-Soo Series: Conference on economics and politics Abstract:
This paper analyzes the political economy of growth as an issue of intergenerational distribution. The first part of the paper develops a model of endogenous growth via human capital accumulation in an overlapping generations setting. Equilibrium growth is inefficient due to the presence of an intergenerational externality. We characterize the set of Pareto efficient paths for physical and human capital accumulation, and find that there is a continuum of efficient growth rate-interest rate combinations. The preferred combination for an infinitely-lived planner will depend on the social discount rate. Competitive equilibrium with subsidized or mandated human capital accumulation may give rise to a Pareto efficient steady state, though for some parameters efficiency requires some intergenerational redistribution. We then argue that a social planner or government with an infinite horizon is incongruous in an OG model when the agents all have finite horizons. Hence the second part of the paper addresses the question of how a government whose decisionmakers reflect the finite horizons of their constituents would choose policies that affect physical and human capital accumulation. Specifically we assume that each government maximizes a weighted sum of utilities of those currently alive. Each period the government selects a policy that takes into account the effect (through state variables) on subsequent policy decisions (and hence on the welfare of the current young generation). Numerical methods involving polynomial approximations are used to compute equilibria under specific parametric assumptions. Equilibrium growth rates turn out to be substantially below efficient rates.
Palavra-chave: Education, Growth, Political economy, Political instability, and Markov equilibrium Sujeito: D72 - Analysis of collective decision-making - Models of political processes : Rent-seeking, elections, legislatures, and voting behavior, O41 - One, Two, and Multisector Growth Models, and D91 - Intertemporal choice and growth - Intertemporal consumer choice ; Life cycle models and saving