Evaluating Policy Rules Under Imperfect Credibility

Download or read book Evaluating Policy Rules Under Imperfect Credibility written by Mr.Paul R. Masson and published by International Monetary Fund. This book was released on 1991-12-01 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt: Evaluation of policy rules using empirical macroeconomic models is usually done on the assumption that the rules are perfectly credible. However, there are usually circumstances that cause the authorities to abandon any given rule. The public's expectations reflect this possibility. In the paper, credibility is assumed to depend on the probability that the authorities will abandon a rule because the resulting utility exceeds that from maintaining the rule. Simulations of a disinflation policy leading to price stability are presented. Its credibility varies over time, depending on the paths for output and inflation.