MONETARY-POLICY IN A GAME - THEORETIC FRAMEWORK

The purpose of this paper is to give a non-technical review of the current issues in the international literature with regard to the game-theoretic approach in monetary policy. After the Lucas-Sargent-Wallace ineffectiveness hypothesis in the seventies a new policy-issue came about dealing with the time-inconsistency of policy makers. This question is closely related to the concepts of policy-credibility and reputation of central banks. According to the game-theoretic approach the interaction process between the strategic behaviour of the policymaker and the rational public will result in an endogenous monetary policy. This implies that a discretionary policy has to be abandoned, because the long-run outcomes in terms of inflation and employment will be less beneficial (Nash-equilibrium) than in the case of a precommitment in monetary policy (rule).