TIME INCONSISTENCY IN A MODEL WITH LAGS, PERSISTENCE, AND OVERLAPPINGWAGE CONTRACTS

The two strands in the literature of monetary analysis, namely that th ere are long lags of monetary policy and the adverse effects of time i nconsistency, have not previously been, but need to be, integrated. To achieve such an objective, in this paper we present a model of a Cent ral Bank game with the realistic features of both lags and persistence effects naturally imbedded in overlapping wage contracts. In our more realistic model, the inflationary bias is much smaller, inflation is less volatile, and the optimal adjustment of monetary instrument needs to be smoother than previously assessed.