What instruments of monetary policy must be used in order to implement a unique equilibrium? This paper revisits the issues addressed by Poole (1970) and Sargent and Wallace (1975) on the multiplicity of equilibria when policy is conducted with either interest rate or money supply rules. We show that if monetary policy is conducted with both interest rates and money supplies as independent instruments it is possible to implement a unique equilibrium. This policy may require the government to set interest rates for all dates and states and in addition set exogenously the money supply every period in some, but not all, states. We show that an alternative policy that would implement a unique equilibrium sets exogenously the state contingent nominal interest rates as well as the initial money supply. These results hold whether prices are flexible or set in advance.
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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number
813.
Length: Date of creation: 2004 Date of revision: Handle: RePEc:red:sed004:813
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Find related papers by JEL classification: 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
References listed on IDEAS 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.:
DREZE, Jacques & POLEMARCHAKIS, Heracles, 2000.
"Monetary equilibria,"
CORE Discussion Papers
2000044, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
[Downloadable!]
Bernardino Adão & Isabel Correia & Pedro Teles, 2001.
"Gaps and triangles,"
Working Paper Series
WP-01-13, Federal Reserve Bank of Chicago.
[Downloadable!]
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