CREDIBILITY AND MONETARY-POLICY IN A MODEL WITH GROWTH

We examine the implications for monetary policy design of including le arning-by-doing effects in a macroeconomic model. We show that an infl ation bias arises because monetary surprises may be exploited to maxim ise potential output by temporarily raising the rate of human capital accumulation. Our model also provides an alternative explanation for t he empirical evidence linking inflation and growth, where the causal l ink goes from slow growth to high inflation. Unlike traditional credib ility models, an inflationary bias can persist even when the authoriti es do not wish to offset labour market distortions through monetary su rprises which undercut the median voter's income.