The pitfalls of discretionary monetary policy

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The pitfalls of discretionary monetary policy

Author Info

Aubhik Khan
Robert G. King
Alexander L. Wolman

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Abstract

In a canonical staggered pricing model, monetary discretion leads to multiple private sector equilibria. The basis for multiplicity is a form of policy complementarity. Specifically, prices set in the current period embed expectations about future policy, and actual future policy responds to these same prices. For a range of values of the fundamental state variable — a ratio of predetermined prices — there is complementarity between actual and expected policy, and multiple equilibria occur. Moreover, this multiplicity is not associated with reputational considerations: it occurs in a two-period model.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 01-16.

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Date of creation: 2001
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Handle: RePEc:fip:fedpwp:01-16

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Keywords: Monetary policy;

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This paper has been announced in the following NEP Reports:

NEP-ALL-2002-03-14 (All new papers)
NEP-CBA-2002-03-14 (Central Banking)
NEP-DGE-2002-03-14 (Dynamic General Equilibrium)
NEP-MON-2002-03-14 (Monetary Economics)

References listed on IDEAS
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Woodford, Michael, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(0), pages 1-35, Supplemen. [Downloadable!] (restricted)
Other versions:
- Woodford, M., 1999. "Optimal Monetary Policy Inertia.," Papers 666, Stockholm - International Economic Studies.
- Woodford, Michael, 2000. "Optimal Monetary Policy Inertia," Seminar Papers 666, Stockholm University, Institute for International Economic Studies. [Downloadable!]
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Other versions:
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Aubhik Khan & Robert G. King & Alexander L. Wolman, 2000. "Optimal monetary policy," Working Paper 00-10, Federal Reserve Bank of Richmond. [Downloadable!]
Other versions:
- Aubhik Khan & Robert King & Alexander L. Wolman, 2002. "Optimal monetary policy," Working Papers 02-19, Federal Reserve Bank of Philadelphia. [Downloadable!]
- Aubhik Khan & Robert G. King & Alexander L. Wolman, 2001. "Optimal monetary policy," Working Papers 01-5, Federal Reserve Bank of Philadelphia. [Downloadable!]
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Other versions:
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Other versions:
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Other versions:
- Per Krusell & Anthony A. Smith, Jr., . "Consumption-Savings Decisions with Quasi-Geometric Discounting," GSIA Working Papers 2001-05, Carnegie Mellon University, Tepper School of Business.
- Krusell, Per & Smith Jr., Anthony A, 2001. "Consumption-Savings Decisions with Quasi-Geometric Discounting," CEPR Discussion Papers 2651, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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V. V. Chari & Lawrence J. Christiano & Martin Eichenbaum, 1996. "Expectation Traps and Discretion," NBER Working Papers 5541, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- V.V. Chari & Lawrence J. Christiano & Martin Eichenbaum, 1996. "Expectations, traps and discretion," Working Papers in Applied Economic Theory 96-04, Federal Reserve Bank of San Francisco.
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Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June. [Downloadable!] (restricted)
Huberto Ennis & Todd Keister, 2001. "Optimal policy with probabilistic equilibrium selection," Working Paper 01-03, Federal Reserve Bank of Richmond. [Downloadable!]
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repec:cup:cbooks:9780521441964 is not listed on IDEAS

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(explanations, 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.)

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.). [Downloadable!]

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This page was last updated on 2009-11-18.

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