Ch 11- Time inconsistency and inflation bias

Question 1

What is inflation bias?

Answer 1

Since money can have real effects in the short run, monetary authorities have an incentive to increase inflation even though a zero rate may be optimal

Question 2

The inflation bias is increasing with the level of ____________

Answer 2

Political interference

Question 3

What is the level of inflation bias determined by?

Answer 3

The political bias towards higher output
The degree of CBs inflation aversion
The responsiveness of inflation to output in the PC

Question 4

What are some ways to reducing inflation bias?

Answer 4

Delegation of MP to a conservative CB
Inflation contract for the CB
Reputation 
Moral suasion
Forward guidance