Question 5 Time inconsistency (10 points) This is a credit question that should only be answered by students who have not received course credit from the seminar exercises Students who have obtained course credit automatically receive 10 points on this question and cannot obtain extra points by answering it Consider an economy that is characterised by the following Phillips curve ( Q), where is unemployment, is the natural rate of unemployment, is inflation, Q is inflation expectations and 0 is a parameter Suppose that the loss function of the central bank is given by 5 (6) ( , ) S 2 2 Agents are assumed to be rational Compute inflation and unemployment if the central bank commits to 0 and is believed by the public (2 points) Compute inflation and unemployment if the central bank acts under discretion (4 points) Compute the loss of the Central Bank under the two regimes and interpret the results (4 points) Question 5 Time inconsistency (10 points) This is a credit question that should only be answered by students who have not received course credit from the seminar exercises Students who have obtained course credit automatically receive 10 points on this question and cannot obtain extra points by answering it Consider an economy that is characterised by the following Phillips curve u u 0(1 me), where u is unemployment, u is the natural rate of unemployment, It is inflation, me is inflation expectations and 0 0 is a parameter Suppose that the loss function of the central bank is given by L(u, IT) u 12 2 Agents are assumed to be rational a Compute inflation and unemployment if the central bank commits to 7 0 and is believed by the public (2 points) b Compute inflation and unemployment if the central bank acts under discretion (4 points) c Compute the loss of the Central Bank under the two regimes and interpret the results (4 points)

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Question 5: Time inconsistency (10 points) This is a credit question that should only be answered by students who have not received course credit from

Question 5: Time inconsistency (10 points)

This is a credit question that should only be answered by students who have not received course credit from the seminar exercises. Students who have obtained course credit automatically receive 10 points on this question and cannot obtain extra points by answering it.

Consider an economy that is characterised by the following Phillips curve: ? = ? ? ?(? ? ?Q),

where ? is unemployment, ? is the natural rate of unemployment, ? is inflation, ?Q is inflation expectations and ? > 0 is a parameter. Suppose that the loss function of the central bank is given by:

5 (6)

?(?, ?) = ? + S ?2. 2

Agents are assumed to be rational.

Compute inflation and unemployment if the central bank commits to ? = 0 and is believed by the public. (2 points)
Compute inflation and unemployment if the central bank acts under discretion. (4 points)
Compute the loss of the Central Bank under the two regimes and interpret the results. (4 points)

Question 5: Time inconsistency (10 points) This is a credit question that should only be answered by students who have not received course credit from the seminar exercises. Students who have obtained course credit automatically receive 10 points on this question and cannot obtain extra points by answering it. Consider an economy that is characterised by the following Phillips curve: u = u - 0(1 - me), where u is unemployment, u is the natural rate of unemployment, It is inflation, me is inflation expectations and 0 > 0 is a parameter. Suppose that the loss function of the central bank is given by: L(u, IT) = u+-12. 2 Agents are assumed to be rational.a. Compute inflation and unemployment if the central bank commits to 7 = 0 and is believed by the public. (2 points) b. Compute inflation and unemployment if the central bank acts under discretion. (4 points) c. Compute the loss of the Central Bank under the two regimes and interpret the results. (4 points)