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 propose a model in which the evolution of interest rate margin (markup) in banking is the outcome of two major components: (i) dynamic oligopolistic conduct and (ii) dynamics of market fundamentals. The model is specified such that oligopolistic dynamics are separated from the dynamics of...

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.