Time consistency, asymmetric information and monetary policy design: An overview

This paper surveys the literature on monetary policy in the context of asymmetric information game theory. It distinguishes between the earlier literature focusing on finding reputational equilibria, the literature analyzing the possibilities of using announcements to influence expectations, and the principal-agent approach to the institutional design of monetary policy. The focus is on the institutional implications of the various studies. The conclusion is that institutional reforms directed at independent central banks with a mandate for price stability are not in line with the recommendations from the theory.