Roc Armenter : Research

I show that the short-term nominal interest rate can anchor private-sector expectations into low inflation---more precisely, into the best equilibrium reputation can sustain. I introduce nominal asset markets in an infinite horizon version of the Barro-Gordon model. I then analyze the subset of sustainable policies compatible with any given asset price system at date t=0. While there are usually many sustainable inflation paths associated with a given set of asset prices, the best sustainable inflation path is implemented if and only if the short-term nominal bond is priced at a certain discount rate. My results suggest that policy frameworks must also be evaluated on their ability to coordinate expectations.