expectations is time-inconsistent. This, it is argued, undermines the credibility of the optimal policy in the eyes of the private … inconsistency problem. They assume that policy-makers suffer a loss of reputation if they renege on earlier commitments. With this …

control theory can be made applicable to economic planning even when expectations are rational (pace Kydland and Prescott …

. In the absence of a reputation for precommitment the optimal policy will lack credibility and the policy-maker must be … to maintain reputation may be sufficient to sustain the optimal, but time-inconsistent, policy. …

We define and study transparency, credibility and reputation in a model where the central bank’s characteristics are … unobservable to the private sector and are inferred from the policy outcome. A low-credibility bank optimally conducts a more … inflationary policy than a high-credibility bank, in the sense that it induces higher inflation, but a less expansionary policy, in …

credibility as a commitment device. But the contract’s strength is that renegotiation can be very visible and this facilitates a …