Discussion Paper No.2201
Abstract :
I incorporate the time-inconsistent preference for hyperbolic discounting into a
monetary search model following Lagos and Wright (2005) and use it to analyze two
economies. One economy consists of sophisticated agents who understand their time
inconsistency, whereas the other consists of na¨ıve agents who do not understand their
time inconsistency. I extend previous analyses of this topic by considering two monetary
policy rules: inflation targeting under which the target variable is the inflation
rate and nominal growth rate targeting under which the target variable is the growth
rate of gross domestic product. Through this analysis, I show that inflation targeting is
a time-inconsistent monetary policy rule in the economy consisting of the na¨ıve agents
even if there is no uncertainty.
Keywords : Hyperbolic discounting; Monetary search model; Monetary policy; Inflation targeting
JEL classification: E52; E70