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Monetary Policy with State Contingent Interest Rates

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  • Bernardino Adão
  • Isabel Horta Correia
  • Pedro Teles

Abstract

What 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 isconducted with interest rate rules. We show that the appropriate interestrate 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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File URL: http://www.bportugal.pt/en-US/BdP%20Publications%20Research/WP200418.pdf
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Bibliographic Info

Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w200418.

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Date of creation: 2004
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Handle: RePEc:ptu:wpaper:w200418

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  1. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Timing and real indeterminacy in monetary models," Working Paper 9910R, Federal Reserve Bank of Cleveland.
  2. Juan Pablo Nicolini & Francisco Buera, 2002. "Optimal Maturity of Governement Debt without state contingent bonds," Department of Economics Working Papers 016, Universidad Torcuato Di Tella.
  3. DREZE, Jacques & POLEMARCHAKIS, Heracles, 2000. "Monetary equilibria," CORE Discussion Papers 2000044, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Bernardino Adao, 2000. "Gaps and Triangles," Econometric Society World Congress 2000 Contributed Papers 1904, Econometric Society.
  5. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
  6. Gaetano Bloise & J. H. Dreze & H. M. Polemarchakis, 2003. "Monetary Equilibria over an Infinite Horizon," Discussion Papers 03-19, University of Copenhagen. Department of Economics.
  7. Bernardino Ad�o & Isabel Correia & Pedro Teles, 2003. "Gaps and Triangles," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 699-713.
  8. George-Marios Angeletos, 2002. "Fiscal Policy With Noncontingent Debt And The Optimal Maturity Structure," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 1105-1131, August.
  9. 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.
  10. Lawrence J. Christiano & Massimo Rostagno, 2001. "Money Growth Monitoring and the Taylor Rule," NBER Working Papers 8539, National Bureau of Economic Research, Inc.
  11. repec:fth:louvco:0044 is not listed on IDEAS
  12. Tomoyuki Nakajima & Herakles Polemarchakis, 2005. "Money and Prices Under Uncertainty," Review of Economic Studies, Oxford University Press, vol. 72(1), pages 223-246.
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Cited by:
  1. Bernardino Adão & Isabel Correia & Pedro Teles, 2004. "Monetary policy with single instrument feedback rules," Working Paper Series WP-04-30, Federal Reserve Bank of Chicago.
  2. Carlos Garcia & Wildo Gonzalez, 2010. "Is more exchange rate intervention necessary in small open economies? The role of risk premium and commodity shocks," ILADES-Georgetown University Working Papers inv248, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.

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