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The Design of Monetary and Fiscal Policy: A Global Perspective

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  • Stefano Eusepi
  • Jess Benhabib

Abstract

We study the the emergence of multiple equilibria in models with capital and bonds under various monetary and fiscal policies. We show that the presence of capital is indeed another independent source of local and global multiplicites, even under active policies that yield local determinacy. We also show how a very similar mechanism generates multiplicities in models with bonds and distortionary taxation. We then explore the design of monetary policies that avoid multiple equilibria. We show that interest rate policies that respond to the output gap, while potentially a source of significant inefficiencies, may be effective in preventing multiple equilibria and costly oscillatory equilibrium dynamics

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2005 Meeting Papers with number 926.

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Date of creation: 2005
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Handle: RePEc:red:sed005:926

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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  1. Stefano Eusepi, 2004. "Does Central Bank Transparency Matter for Economic Stability," Computing in Economics and Finance 2004, Society for Computational Economics 176, Society for Computational Economics.
  2. Schmitt-Grohé, Stephanie & Uribe, Martín, 2004. "Optimal Operational Monetary Policy in the Christiano-Eichenbaum-Evans Model of the US Business Cycle," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4654, C.E.P.R. Discussion Papers.
  3. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 27(1), pages 129-147, February.
  4. Schmitt-Grohe, Stephanie & Uribe, Martin, 1997. "Balanced-Budget Rules, Distortionary Taxes, and Aggregate Instability," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(5), pages 976-1000, October.
  5. Stephanie Schmitt-Grohé & Martín Uribe, 2007. "Optimal simple and implementable monetary and fiscal rules," Working Paper, Federal Reserve Bank of Atlanta 2007-24, Federal Reserve Bank of Atlanta.
  6. Sbordone, Argia M., 2002. "Prices and unit labor costs: a new test of price stickiness," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(2), pages 265-292, March.
  7. Charles T. Carlstrom & Timothy S. Fuerst, 2003. "Investment and interest rate policy: a discrete time analysis," Working Paper 0320, Federal Reserve Bank of Cleveland.
  8. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 1998. "The perils of Taylor Rules," Departmental Working Papers, Rutgers University, Department of Economics 199831, Rutgers University, Department of Economics.
  9. Lawrence J. Christiano & Sharon G. Harrison, 1996. "Chaos, Sunspots, and Automatic Stabilizers," NBER Working Papers 5703, National Bureau of Economic Research, Inc.
  10. Lars E.O. Svensson & Michael Woodford, 2004. "Implementing Optimal Policy through Inflation-Forecast Targeting," NBER Chapters, in: The Inflation-Targeting Debate, pages 19-92 National Bureau of Economic Research, Inc.
  11. Susanto Basu & John G. Fernald, 1996. "Returns to scale in U.S. production: estimates and implications," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 546, Board of Governors of the Federal Reserve System (U.S.).
  12. Dupor, Bill, 2001. "Investment and Interest Rate Policy," Journal of Economic Theory, Elsevier, vol. 98(1), pages 85-113, May.
  13. Benhabib, J. & Schmitt-Grohe, S. & Uribe, M., 1998. "Monetary Policy and Multiple Equilibria," Working Papers, C.V. Starr Center for Applied Economics, New York University 98-02, C.V. Starr Center for Applied Economics, New York University.
  14. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(1), pages 1-45, February.
  15. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
  16. Tommy Sveen & Lutz Weinke, 2004. "Firm-Specific Investment, Sticky Prices, and the Taylor Principle," Working Paper, Norges Bank 2004/12, Norges Bank.
  17. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 2000. "Avoiding Liquidity Traps," Departmental Working Papers, Rutgers University, Department of Economics 199925, Rutgers University, Department of Economics.
  18. Bernanke, Ben S & Woodford, Michael, 1997. "Inflation Forecasts and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 29(4), pages 653-84, November.
  19. Pierpaolo Benigno & Michael Woodford, 2004. "Inflation Stabilization and Welfare: The Case of a Distorted Steady State," NBER Working Papers 10838, National Bureau of Economic Research, Inc.
  20. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  21. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Chaotic Interest Rate Rules," Departmental Working Papers, Rutgers University, Department of Economics 200109, Rutgers University, Department of Economics.
  22. Lawrence J. Christiano & Massimo Rostagno, 2001. "Money Growth Monitoring and the Taylor Rule," NBER Working Papers 8539, National Bureau of Economic Research, Inc.
  23. Stephanie Schmitt-Grohe & Martin Uribe, 1997. "Price level determinacy and monetary policy under a balanced-budget requirement," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1997-17, Board of Governors of the Federal Reserve System (U.S.).
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