Credible Monetary Policy with Private Government Preferences

This paper provides recursive methods for analyzing the credible equilibria of an incomplete information monetary policy game. The policy game is one in which a large, uncommitted, benevolent government has a short run temptation to engage in an unanticipated monetary expansion. However, it also has the opportunity to mimic a government that is committed to the optimal ex ante monetary policy actions. The recursive methods provide the basis for an algorithm which is used to compute the set of credible equilibrium payoffs and to analyze reputation building in incomplete information contexts. The algorithm is used to explore the idea that incomplete information monetary policy games of this kind have fewer equilibria and less indeterminacy than their complete information counterparts.