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Monetary Policy with State Contingent Interest Rates

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  • Pedro Teles

    (Banco de Portugal, Universidade Catolica Portuguesa and CEPR)

  • Isabel Correia

    (Banco de Portugal, Universidade Catolica Portuguesa and CEPR)

  • Bernardino Adão

    (Banco de Portugal)

Abstract

Under a monetary policy rule for the nominal interest rate, i.e. the return on risk-free short-term nominal bonds, there may be a unique local equilibrium, but there are in general multiple global equilibria. We show that the appropriate interest rate instruments under uncertainty are state-contingent interest rates, i.e. the nominal returns on state-contingent nominal assets. A policy that pegs the state-contingent interest rates implements a unique equilibrium globally. This policy is particularly relevant at the zero bound.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 960.

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Date of creation: 2009
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Handle: RePEc:red:sed009:960

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  1. Bernardino Ad�o & Isabel Correia & Pedro Teles, 2003. "Gaps and Triangles," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 699-713.
  2. 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.
  3. DREZE, Jacques & POLEMARCHAKIS, Heracles, 1995. "Monetary equilibria," CORE Discussion Papers 1995078, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Timing and real indeterminacy in monetary models," Working Paper 9910R, Federal Reserve Bank of Cleveland.
  5. repec:fth:louvco:0044 is not listed on IDEAS
  6. Gaetano Bloise & Jacques Dréze & Herakles Polemarchakis, 2005. "Monetary equilibria over an infinite horizon," Economic Theory, Springer, vol. 25(1), pages 51-74, 01.
  7. 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.
  8. 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.
  9. Bernardino Adao, 2000. "Gaps and Triangles," Econometric Society World Congress 2000 Contributed Papers 1904, Econometric Society.
  10. Tomoyuki Nakajima & Herakles Polemarchakis, 2005. "Money and Prices Under Uncertainty," Review of Economic Studies, Oxford University Press, vol. 72(1), pages 223-246.
  11. McCallum, Bennett T., 1981. "Price level determinacy with an interest rate policy rule and rational expectations," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 319-329.
  12. Lawrence J. Christiano & Massimo Rostagno, 2001. "Money Growth Monitoring and the Taylor Rule," NBER Working Papers 8539, National Bureau of Economic Research, Inc.
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Cited by:
  1. Pedro Teles & Isabel Correia & Bernardino Adao, 2007. "Monetary Policy with Single Instrument Feedback Rules," 2007 Meeting Papers 622, Society for Economic Dynamics.
  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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