"[G]overnments have not adopted precommitment strategies ('rules')

to help them resist temptation; nor have they created incentivecompatible

compensation schemes for their central bankers. Instead,

they brought inflation down dramatically [in the 1980s] by purely

discretionary policy decisions." (Blinder 1997).

(a) Suppose you wish to use the Barro-Gordon model to explain

the fall in inflation since 1980. What are the various possible

parameter shifts that could explain a decrease in the inflation

rate? What would you look for, in other data, to determine which,

if any, of these possible explanations is correct?

(b) Does the fact that US inflation was reduced to only 3 percent

(from 14 percent), under a discretionary regime, weaken the case

for rules as a strategy for avoiding inflation?