Does the Time-Consistency Problem Explain the Behavior of Inflation in the United States?
Peter N. Ireland
This paper derives the restrictions imposed by Barro and Gordon's theory of time-consistent monetary policy on a bivariate time-series model for inflation and unemployment and tests those restrictions using quarterly US data from 1960 through 1997. The results show that the data are consistent with the theory's implications for the long-run behavior of the two variables, indicating that the theory can explain inflation's initial rise and subsequent fall over the past four decades. The results also suggest that the theory must be extended to account more fully for the short-run dynamics that appear in the data.
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