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© 1998 Oxford University Press

research-article

Credibility and monetary policy in a model with growth

V. Anton Muscatelli* and Patrizio Tirelli{dagger}

* Department of Economics, University of Glasgow Adam Smith Building, Glasgow G12 8RT; e-mail: V.A.Muscatelli{at}socsci.gla.ac.uk
{dagger} Universitá Statale Milano

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


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