A General Theory (and Some Evidence) of Expectation Traps in Monetary Policy
AbstractI show that multiple equilibria are a general property of economies under full monetary policy discretion. Three simple conditions are sufficient to rule out, generically, a unique equilibrium in a static economy. The key departure from Barro and Gordon (1983) is to consider bounded welfare costs of inflation. I also show that in a two Markov equilibrium economy the inflation response to certain perturbations is, generically, qualitatively different in each equilibrium. Finally, I discuss some evidence on inflation dynamics that supports the hypothesis that U.S. monetary policy was caught in an expectation trap during the high inflation episode of the 1970s. Copyright (c) 2008 The Ohio State University.
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Bibliographic InfoArticle provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.
Volume (Year): 40 (2008)
Issue (Month): 5 (08)
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- Armenter, Roc & Bodenstein, Martin, 2008.
"Can The U.S. Monetary Policy Fall (Again) In An Expectation Trap?,"
Cambridge University Press, vol. 12(05), pages 664-693, November.
- Roc Armenter & Martin Bodenstein, 2006. "Can the U.S. monetary policy fall (again) in an expectation trap?," International Finance Discussion Papers 860, Board of Governors of the Federal Reserve System (U.S.).
- Eric Swanson & Gauti Eggertsson, 2007. "Optimal Time-Consistent Monetary Policy in the New Keynesian Model with Repeated Simultaneous Play," 2007 Meeting Papers 214, Society for Economic Dynamics.
- David M. Arseneau, 2004.
"Expectation traps in a New Keynesian open economy model,"
Finance and Economics Discussion Series
2004-45, Board of Governors of the Federal Reserve System (U.S.).
- David Arseneau, 2012. "Expectation traps in a new Keynesian open economy model," Economic Theory, Springer, vol. 49(1), pages 81-112, January.
- Roc Armenter & Martin Bodenstein, 2006.
"Does the time inconsistency problem make flexible exchange rates look worse than you think?,"
International Finance Discussion Papers
865, Board of Governors of the Federal Reserve System (U.S.).
- Roc Armenter & Martin Bodenstein, 2005. "Does the time inconsistency problem make flexible exchange rates look worse than you think?," Staff Reports 230, Federal Reserve Bank of New York.
- Armenter, Roc, 2013. "The perils of nominal targets," Working Papers 14-2, Federal Reserve Bank of Philadelphia.
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