The paper addresses the Kydland and Prescott (1977) argument that the optimal policy in models with rational expectations is time-inconsistent. This, it is argued, undermines the credibility of the optimal policy in the eyes of the private sector, who will expect the policy-maker to reoptimize....

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 several recent papers macroeconomic policy has been modelled in the context of a game of incomplete information. A central result of the work by Backus and Driffill and by Barro is that the uncertainty may provide an incentive for the government to maintain a socially efficient policy of zero...

The paper investigates the sustainability of cooperative rules for the conduct of macroeconomic policy in a two-country world. The problem is set out as a supergame in which the threat strategy is to switch to a Nash non-cooperative equilibrium. A number of possible non-cooperative equilibria...