Sustainable monetary policy and inflation expectations

The short-term nominal interest rate can anchor private-sector expectations into low inflation - more precisely, into the best equilibrium reputation can sustain. I introduce nominal asset markets in an infinite horizon version of the Barro-Gordon model and characterize the subset of - sustainable policies compatible with any given asset price system at date t = 0. While there are usually many sustainable inflation paths associated with a given set of asset prices, the best sustainable inflation path is implemented if and only if the short-term nominal bond is priced at a certain discount rate at date t = 0.