Designing a Monetary Policy Mechanism Based on Policymaker’s Reputation and Rational Agent’s Power

Document Type : Original Article

Authors

1 Associate Professor, Department of Economics, University of Tehran

2 PhD student of Economics, Mofid University, Qom, Iran.

Abstract

One of the most challenging issues related to the monetary policy is the causes and origins of inflationary shocks and biases. There are two approaches to the monetary policy in general: first, monetary policy based on discretion, and second, monetary policy based on a specific rule. Economists of New Classical School believe that monetary policy should be based on a monetary rule. Accordingly, the cause of inflationary shocks and biases can be considered as a violation of the monetary rule. They believe that economic agents make their expectations rationally. Therefore, an announced monetary policy will not have a real impact and will only cause inflation. As a result, an economists' effort could be to explain the government's motives for violating the monetary rule and to make policy recommendations based on it. This article tries to provide a new solution to the problem of violation of the monetary rule by using a special type of mechanism so called "Clark mechanism" (pivotal or person-centered mechanism) as well as designing micro-bases for the government behavior and rational agents and relying on the issue of government reputation.

Keywords

References

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Program and Development Research
Volume 1, Issue 3
June 2020
Pages 36-78

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