Sustainable Monetary Policy and Expectations
AbstractInfinitely repeated games have been used to argue that reputation can substitute for commitment in monetary policymaking. A drawback of this approach is that it implies multiple equilibria. I argue that nominal asset prices can be used as an equilibrium selection mechanism. First, I introduce real and nominal asset trading in a way that preserves the full equilibrium set. I then analyze the subset of sustainable policies compatible with a given asset price schedule. I show that the best sustainable monetary policy is implemented if and only if the short term nominal bond is priced at a certain value at date t=0. Hence, if the monetary authority is a price-setter in the short term nominal bond market at date t=0, it can effectively coordinate expectations on the best sustainable policy. However, if the monetary authority can set nominal asset prices at all dates, then the equilibrium set collapses to the subset of one-period equilibria
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 183.
Date of creation: 03 Dec 2006
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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
Web page: http://www.EconomicDynamics.org/society.htm
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Monetary Policy; Reputation; Equilibrium Selection;
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
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