Reputational Constraint and Signalling Effects in a Monetary Policy Game.

This paper studies reputational constraint in a monetary policy game. The paper extends the standard Barro-Gordon model by considering a continuum of types of policy maker and exogenous disturbances and/or control errors in money supply. A sequential Nash equilibrium of this game shows that it involves no mixed strategies, and that every type of policymaker tries to appear drier in the first stage. The results suggest that the drawbacks in the previous studies, pointed by Rogoff (1986), are not generic but rather caused by special structures of their models. This paper also examines how the strength of reputational constraint is affected by the model's parameters, whether asymetric information is beneficial, and the relationship between the reputational constraint and the pattern of real economic fluctuations. Copyright 1990 by Royal Economic Society.