Monetary policy with state contingent interest rates
AbstractWhat instruments of monetary policy must be used in order to implement a unique equilibrium? This paper revisits the issues addressed by Sargent and Wallace (1975) on the multiplicity of equilibria when policy is conducted with interest rate rules. We show that the appropriate interest rate instruments under uncertainty are state- contingent interest rates, i.e. the nominal returns on state-contingent nominal assets. A policy that pegs state-contingent nominal interest rates, and sets the initial money supply, implements a unique equilibrium. These results hold whether prices are flexible or set in advance.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-04-26.
Date of creation: 2004
Date of revision:
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Other versions of this item:
- Pedro Teles & Bernardino Adao & Isabel Correia, 2004. "Monetary Policy with State Contingent Interest Rates," 2004 Meeting Papers 813, Society for Economic Dynamics.
- Bernardino Adão & Isabel Horta Correia & Pedro Teles, 2004. "Monetary Policy with State Contingent Interest Rates," Working Papers w200418, Banco de Portugal, Economics and Research Department.
- Pedro Teles & Isabel Correia & Bernardino Adão, 2009. "Monetary Policy with State Contingent Interest Rates," 2009 Meeting Papers 960, Society for Economic Dynamics.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-05-23 (All new papers)
- NEP-CBA-2005-05-23 (Central Banking)
- NEP-MAC-2005-05-23 (Macroeconomics)
- NEP-MON-2005-05-23 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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