《宏观经济学 Macroeconomics》课外读物：RULES, DISCRETION AND REPUTATION IN A MODEL OF MONETARY POLICY

NBER WORKING PAPER SERIES RULES, DISCRETION AND REPUTATION IN A MODEL OF MONETARY POLICY Robert J. Barro David B. Gordon Working Paper No·1079 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avent Cambridge MA 02138 1983 Prepared for the conference on "Alternative Monetary Standards," Rochester, N.Y., October 1982. We have benefitted from discussion at the conference and from seminars at Chicago, Northwestern and Iowa. We are particularly grateful for comments from Gary Fethke, Roger Myerson, Jose Scheinkman, and John Taylor. Part of this research is supported by the National Science Foundation. The research reported here is part of the NBER's research program in Economic Fluctuations. Any opinions expressed are those of the authors and not those of the National Bureau of Economic Research

NBER WORKING PAPER SERIES RULES, DISCRETION AND REPUTATION IN A MODEL OF MONETARY POLICY Robert J. Barro David B. Gordon Working Paper No. 1079 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge MA 02138 February 1983 Prepared for the conference on "Alternative Monetary Standards," Rochester, N.Y., October 1982. We have benefitted from discussion at the conference and from seminars at Chicago, Northwestern and Iowa. We are particularly grateful for comments from Gary Fethke, Roger Myerson, Jose Scheinkman, and John Taylor. Part of this research is supported by the National Science Foundation. The research reported here is part of the NEER's research program in Economic Fluctuations. Any opinions expressed are those of the authors and not those of the National Bureau of Economic Research

NBER Working Paper #1079 February 1983 Rules, Discretion and Reputation in a Model of Monetary Policy Abstract In a discretionary regime the monetary authority can print more money and create more inflation than pcople expect. But, al though these inflation surprises can have some benefits, they cannot arise systematically in equilibrium when people understand the policymaker's incentives and form their expectations accordingly. Because the policymaker has the power to create inflation shocks ex post, the equilibrium growth rates of money and prices turn out to be higher than otherwise. There fore, enforced commitments (rules) for monetary behavior can improve matters. Given: the repeated interaction between the policymaker and the private agents, it is possible that reputational forces can substitute for formal rules Here, we develop an example of a reputational equilibrium where the out comes turn out to be weighted averages of those from discretion and those from the ideal rule. In particular, the rates of inflation and monetary growth look more like those under discretion when the discount rate is h obert j. Barro Economics D University of chi 1126 E. 59th Stree Chicago, Illinois 6063 (312)962-8923 David B. Gordon Economics Department University of Rochester Rochester, N.Y. 1462 (716)275-2627

NBER Working Paper #1079 February 1983 Rules, Discretion and Reputation in a Model of Monetary Policy Abs tract In a discretionary regime the monetary authority can print more money and create more inflation than people expect. But, although these inflation surprises can have some benefits, they cannot arise systematically in equilibrium when people understand the policymakor's incentives and form their expectations accordingly. Because the policymaker has the power to create inflation shocks ex post, the equilibrium growth rates of money and prices turn out to be higher than otherwise. Therefore, enforced commitments (rules) for monetary behavior can improve matters. Given the repeated interaction between the policymaker and the private agents, it is possible that reputational forces can substitute for formal rules. Here, we develop an example of a reputational equilibrium where the out￾comes turn out to be weighted averages of those from discretion and those from the ideal rule. In particular, the rates of inflation and monetary growth look more like those under discretion when the discount rate is high. Robert J. Barro Ecdnomics Department University of Chicago 1126 E. 59th Street Chicago, Illinois 60637 (312) 962-8923 • David B. Gordon Economics Department University of Rochester Rochester, N.Y. 14627 (716) 275-2627

a discretionary regime the monetary authority can print more money and create more inflation than people expect. The benefits from this sur- prise inflation may include expansions of economic activity and reductions n the real value of the government's nominal liabilities. However, because people understand the policymaker's incentives, these types of surprises--and their resulting benefits--cannot arise systematically in equilibrium People ad just their inflationary expectations in order to eliminate a con sistent pattern of surprises. In this case the potential for creating infla- tion shocks, ex post, means that, in equilibrium, the average rates of inflation and monetary growth--and the corresponding costs of inflation- will be higher than otherwise Enforced commitments on monetary behavior, as embodied in monetary or price rules, eliminate the potential for ex post surprises. Therefore, the equilibrium rates of inflation and monetary growth can be 1 tary institutions that all to ones that enforce rules ten monetary rules are in place, the policymaker has the tempt each period to cheat" in order to secure the benefits from inflation shocks B f existing distortions in the economy, these benefits can accrue enerally to private agents, rather than merely to policymaker.)How ever, this tendency to cheat threatens the viability of the rules equilibrium and tends to move the economy toward the inferior equilibrium under dis cretion. Because of the repeated interactions between the policymaker and the private agents, it is possible that reputational forces can support the rule. That is, the potential loss of reputation--or credibility--moti vates the policymaker to abide by the rule. Then, the policymaker foregoes the short-term benefits from inflation shocks in order to secure the ga

In a discretionary regime the monetary authority can print more money and create more inflation than people expect. The benefits from this sur￾prise inflation may include expansions of economic activity and reductions in the real value of the government's nominal liabilities. However, because people understand the policymaker's incentives, these types of surprises--and their resulting benefits- -cannot arise systematically in equilibrium. People adjust their inflationary expectations in order to eliminate a con￾sistent pattern of surprises. In this case the potential for creating infla￾tion shocks, ex post, means that, in equilibrium, the average rates of inflation and monetary growth--and the corresponding costs of inflation-- will be higher than otherwise. Enforced commitments on monetary behavior, as embodied in monetary or price rules, eliminate the potential for ex post surprises. Therefore, the equilibrium rates of inflation and monetary growth can be lowered by shifts from monetary institutions that allow discretion to ones that enforce rules. When monetary rules are in place, the policymaker has the temptation each period to "cheat" in order to secure the benefits from inflation shocks. (Because of existing distortions in the economy, these benefits can accrue generally to private agents, rather than merely to the policymaker.) How￾ever, this tendency to cheat threatens the viability of the rules equilibrium and tends to move the economy toward the inferior equilibrium under dis￾cretion. Because of the repeated interactions between the policymaker and the private agents, it is possible that reputational forces can support the rule. That is, the potential loss of reputation--or credibility--moti￾vates the policymaker to abide by the rule. Then, the policymaker foregoes the short-term benefits from inflation shocks in order to secure the gain

from low average inflation over the long term We extend the positive theory of monetary policy from our previous paper (Barro and Gordon, 1983)to allow for reputational forces. Some mone tary rules, but generally not the ideal one, can be enforced by the policy maker's potential loss of reputation. We find that the resulting equili- brium looks like a weighted average of that under discretion and that under the ideal rule. Specifically, the outcomes are superior to those under discretion--where no commitments are pertinent--but inferior to those under the ideal rule (which cannot be enforced in our model by the potential loss of reputation). The results look more like discretion when the policy maker 's discount rate is high, but more like the ideal rule when the discount rate is low. Otherwise, we generate predictions about the behavior of monetary growth and inflation that resemble those from our previous anal ysis of discretionary policy. Namely, any change that raises the benefits of inflation shocks--such as a supply shock or a war--leads to a higher owth rate of money and prices The Policymaker's objective As in our earlier analysis, we think of the monetary authority 's objective as reflecting the preferences of the "representative" private agent. Ultimately, we express this objective as a function of actual and expected rates of inflation. Specifically, benefits derive from positive inflation shocks (at least over some range), but costs attach to higher rates of inflation

—2— from low average inflation over the long term. We extend the positive theory of monetary policy from our previous paper (Barro and Gordon, 1983) to allow for reputational forces. Some mone￾tary rules, but generally not the ideal one, can be enforced by the policy￾maker's potential loss of reputation. We find that the resulting equili￾brium looks like a weighted average of that under discretion and that under the ideal rule. Specifically, the outcomes are superior to those under discretion--where no commitments are pertinent--but inferior to those under the ideal rule (which cannot be enforced in our model by the potential loss of reputation). The results look more like discretion when the policy￾maker's discount rate is high, but more like the ideal rule when the discount rate is low. Otherwise, we generate predictions about the behavior of monetary growth and inflation that resemble those from our previous anal￾ysis of discretionary policy. Namely, any change that raises the benefits of inflation shocks--such as a supply shock or a war--leads to a higher growth rate of money and prices. The Policymaker's Objective As in our earlier analysis, we think of the monetary authority's objective as reflecting the preferences of the "representative" private agent. Ultimately, we express this objective as a function of actual and expected rates of inflation. Specifically, benefits derive from positive inflation shocks (at least over some range), but costs attach to higher rates of inflation

The Benefits from Surprise Inflation We assume that some benefits arise when the inflation rate for period t t exceeds the anticipated amount,t One source of benefits--discussed in Barro and Gordon (1981)and in an example from Kydland and prescott(1977 p 477)--derives from the expectational Phillips Curve. Here, unanticipate monetary expansions, reflected in positive values for T lead to increases in real economic activity. Equivalently, these nominal shock lower the unemployment rate below the natural rate. By the natural rate, we mean here the value that would be ground out by the private sector in the absence of monetary disturbances. This natural rate can shift over time because of supply shocks, demographic changes, shifts in governmental tax and transfer programs, and so on. The natural rate also need not be optimal In fact, the benefits from surprise inflation arise when the policymaker views the natural rate as excessive. This can occur, for example, if the distortions from income taxation, unemployment compensation, and the like make the average level of privately-chosen work and production too low. Be cause of the externalities from these distortions, the government (andthe private agents) would value stimulative policy actions that lower the unem ployment rate below its natural value Other sources of benefits from surprise inflation involve governmental revenues. Barro (1983) focuses on the proceeds from inflationary finance The expectation of inflation (formed the previous period),T determines people's holdings of real cash, M,-1/Pt-1. Surprise inflation-ic t depreciates the real value of these holdings, which allows the government to issue more new money in real terms,(M -Mt-1/P,, as a replacement. The policymaker values this inflationary finance if alternative methods of

-3- The Benefits from Surprise Inflation We assume that some benefits arise when the inflation rate for period t, exceeds the anticipated amount, n. One source of benefits--discussed in Barro and Gordon (1981) and in an example from Kydland and Prescott (1977, p.477)--derives from the expectational Phillips Curve. Here, unanticipated monetary expansions, reflected in positive values for iTt - lead to increases in real economic activity. Equivalently, these nominal shocks lower the unemployment rate below the natural rate. By the natural rate, we mean here the value that would be ground out by the private sector in the absence of monetary disturbances. This natural rate can shift over time because of supply shocks, demographic changes, shifts in governmental tax and transfer programs, and so on. The natural rate also need not be optimal. In fact, the benefits from surprise inflation arise when the policymaker views the natural rate as excessive, This can occur,' for example, if the distortions from income taxation, unemployment compensation, and the like make the average level of privately-chosen work and production too low. Be￾cause of the externalities from these distortions, the government (and the private agents) would value stimulative policy actions that lower the unem￾ployment rate below its natural value. Other sources of benefits from surprise inflation involve governmental revenues. Barro (1983) focuses on the proceeds from inflationary finance. The expectation of inflation (formed the previous period), 'rr, determines people's holdings of real cash, Mt i/Pt . Surprise inflation, depreciates the real value of these holdings, which allows the government to issue more new money in real terms, (Mt - Mt1)/Pt, as a replacement. The policymaker values this inflationary finance if alternative methods of