Inflation Bias with Dynamic Phillips Curves and Impatient Policy Makers

Paper number: 08/02

Paper date: March 20, 2008

Year: 2008

Paper Category: Working Paper

Authors

Tatiana Kirsanova, David Vines and Simon Wren-Lewis

Abstract

We generalise the analysis of inflation bias with dynamic Phillips curves in three respects. First, we examine the discretionary (time consistent) solution in cases where the Phillips curve has both a backward looking and forward-looking component. Second, we show that the commitment (time inconsistent) solution does not normally involve zero inflation and output at its natural rate. Instead, with a purely forward-looking Phillips curve and positive discounting, it will involve a dynamic path for inflation in which steady state inflation is below its target. In this sense, we obtain negative inflation bias. Third, we show that the timeless perspective policy has the same steady state as the commitment case, but without any short-term output gains.

Inflation Bias with Dynamic Phillips Curves and Impatient Policy Makers Inflation Bias with Dynamic Phillips Curves and Impatient Policy Makers