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Sophisticated Monetary Policies

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  • Andrew Atkeson

    (University of California, Los Angeles, Federal Reserve Bank of Minneapolis, and National Bureau of Economic Research.)

  • Varadarajan V. Chari

    (University of Minnesota and Federal Reserve Bank of Minneapolis.)

  • Patrick J. Kehoe

    (Federal Reserve Bank of Minneapolis, University of Minnesota, and National Bureau of Economic Research.)

Abstract

In standard monetary policy approaches, interest-rate rules often produce indeterminacy. A sophisticated policy approach does not. Sophisticated policies depend on the history of private actions, government policies, and exogenous events and can differ on and off the equilibrium path. They can uniquely implement any desired competitive equilibrium. When interest rates are used along the equilibrium path, implementation requires regime-switching. These results are robust to imperfect information. Our results imply that the Taylor principle is neither necessary nor sufficient for unique implementation. They also provide a direction for empirical work on monetary policy rules and determinacy. (c) 2010 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology..

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Bibliographic Info

Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 125 (2010)
Issue (Month): 1 (February)
Pages: 47-89

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Handle: RePEc:tpr:qjecon:v:125:y:2010:i:1:p:47-89

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  1. Marco Bassetto, 2002. "A Game-Theoretic View of the Fiscal Theory of the Price Level," Econometrica, Econometric Society, vol. 70(6), pages 2167-2195, November.
  2. Maurice Obstfeld & Kenneth Rogoff, 1982. "Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?," NBER Working Papers 0855, National Bureau of Economic Research, Inc.
  3. Backus, David & Driffill, John, 1985. "Inflation and Reputation," American Economic Review, American Economic Association, vol. 75(3), pages 530-38, June.
  4. John H. Cochrane, 2011. "Determinacy and Identification with Taylor Rules," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 565 - 615.
  5. Adao, Bernardino & Correia, Maria Isabel Horta & Teles, Pedro, 2005. "Monetary Policy with Single Instrument Feedback Rules," CEPR Discussion Papers 4948, C.E.P.R. Discussion Papers.
  6. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  7. Bennett T. McCallum, 1982. "Price Level Determinacy with an Interest Rate Policy Rule and Rational Expectations," NBER Working Papers 0559, National Bureau of Economic Research, Inc.
  8. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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  1. Minneapolis Redux
    by Stephen Williamson in Stephen Williamson: New Monetarist Economics on 2013-12-22 22:47:00
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Cited by:
  1. Bertoli, Simone & Fernández-Huertas Moraga, Jesús & Ortega, Francesc, 2010. "Immigration Policies and the Ecuadorian Exodus," IZA Discussion Papers 4737, Institute for the Study of Labor (IZA).
  2. Bernardino Adao & Isabel Correia & Pedro Teles, 2011. "Unique Monetary Equilibria with Interest Rate Rules," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(3), pages 432-442, July.
  3. Sánchez-Fung, José R., 2011. "Estimating monetary policy reaction functions for emerging market economies: The case of Brazil," Economic Modelling, Elsevier, vol. 28(4), pages 1730-1738, July.
  4. Francesco Bianchi & Leonardo Melosi, 2013. "Dormant Shocks and Fiscal Virtue," Working Papers 13-12, Duke University, Department of Economics.
  5. Bertoli, Simone & Fernández-Huertas Moraga, Jesús, 2012. "Visa Policies, Networks and the Cliff at the Border," IZA Discussion Papers 7094, Institute for the Study of Labor (IZA).

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