1983/08/01 by Robert J. Barro, D. Benjamin Gordon · 4 citations
Economics, Econometrics and Finance · #Economic theories and models #Monetary Policy and Economic Impact #Economic Theory and Policy #Economics #Monetary policy #Commit #Inflation (cosmology) #Discretion #Unemployment #Precommitment #Surprise #Monetary economics #Argument (complex analysis) #Government (linguistics) #Value (mathematics) #Macroeconomics #Microeconomics
paper · doi:10.1086/261167
openalex publication_date 1983/08/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/30
A discretionary policymaker can create surprise inflation, which may reduce employment and raise government revenue. But when people understand the policymaker's objectives, these surprises cannot occur systematically. In equilibrium people form expectations rationally and the policymaker optimizes in each period, subject to the way that people form expectations. Then, we find that (1) the rates of monetary growth and inflation are excessive; (2) these rates depend on the slope of Phillips curve, the natural unemployment rate, and other variables that affect the benefits and costs from inflation; (3) the monetary authority behaves countercyclically; and (4) unemployment is independent of money policy. Outcomes improve if rules commit future policy choices in the appropriate manner. The value of these commitments--which amount to long-term contracts between the government and the private sector--underlies the argument for rules over discretion.