Monetary Policies, Credibility and International Coordination

Abstract

An exciting recent development in macroeconomics is the application of models of strategic behaviour to the study of government economic policies. The initial inspiration for these ideas came from the distinction between anticipated and unanticipated monetary and price changes in the kinds of models that we have considered in Chapter 20. For example, if only unanticipated money and unexpected changes in the price level matter for real variables, then policymakers who wish to affect real variables have an incentive to surprise people. But if individuals form expectations rationally, then it is difficult to fool people systematically.^l The resolution of these conflicting objectives involves the strategic interplay between the policymakers and individuals in the economy.