DoestheBarro-GordonModelExplaintheBehaviorofInflation.ppt

DoestheBarro-GordonModelExplaintheBehaviorofInflation.ppt

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DoestheBarro-GordonModelExplaintheBehaviorofInflation.ppt

Does the Barro-Gordon Model Explain the Behavior of Inflation in Romania? MSc Student: Ana Alexe Supervisor: Professor Mois? Alt?r Topics Introduction Literature review Barro-gordon time consistency model Input data The natural rate of unemployment estimations Inflation and unemployment estimations according to barro-gordon model Unit root tests Cointegration tests Conclusions 1. Introduction There are many situations in which one economic agent (the government for example) has an incentive to deceive another economic agent. Intuitively, the policymaker, who aims to bring the unemployment rate closer to its natural rate, is tempted to do so by creating surprise inflation. Households, being rational agents, perfectly anticipate this temptation to inflate and adjust their decisions accordingly. As a result, the equilibrium outcome is a situation with no reduction in unemployment and higher inflation than before (the `inflation bias result). The purpose of this paper is to analyze the time-inconsistency problem between inflation and unemployment rate series for?Romania, using unit root tests and co-integration tests, Hodrick-Prescott filter and Kalman filter as estimation techniques, in order to test the Barro-Grodon model’s implications. 2. Literature review In the literature there are known different types of time-inconsistency: time-inconsistency due to changes in preferences over time (Strotz (1956)) time-inconsistency of government plans when agents have rational expectations (Lucas (1976), Kydland Prescott (1977), Barro Gordon (1983)). The idea that the proper design of monetary policy is crucial to achieve good inflation outcomes was first proposed by Kydland and Prescott (1977). A key result is that if policymakers cannot commit to future policies, inflation rates are higher than if they can commit. Barro and Gordon (1983) further developed this idea. They argue that an optimal punishment mechanism is in place and that no intervention is necessar

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