This paper challenges the dominant model which was used to explain the chronic inflation process, as in Latin America in the seventies and eighties. Unlike the usual long term view we present a variant of the Barro and Gordon policy game model which is based on short term considerations in the...

This paper challenges the dominant model which was used to explain the chronic inflation process, as in Latin America in the seventies and eighties. Unlike the usual long term view we present a variant of the Barro and Gordon policy game model which is based on short term considerations in the...

We offer an explanation of why optimal policy under commitment requires weaker reaction to supply shock, reflected in the failure of the Taylor principle. This lesson seems to be prevalent among central banks and yet has been analyzed incomprehensively in the economic literature.