Credibility and Monetary Policy in a Model with Growth

The authors examine the implications for monetary policy design of including learning-by-doing effects in a macroeconomic model. They show that an inflation bias arises because monetary surprises may be exploited to maximize potential output by temporarily raising the rate of human capital accumulation. The authors' model also provides an alternative explanation for the empirical evidence linking inflation and growth, where the causal link goes from low growth to high inflation. Unlike traditional credibility models, an inflationary bias can persist even when the authorities do not wish to offset labor-market distortions through monetary surprises that undercut the median voter's income. Copyright 1998 by Royal Economic Society