Multiple equilibria in the absence of commitment

This paper shows how multiple equilibria can arise under discretionary monetary policy in a standard New Keynesian model with capital accumulation. Strategic interaction between policy-makers at different points in time—operating through private-sector expectations from the future to the present, and through endogenous state variables from the present to the future—generates strategic complementarity and leads to multiple discretionary equilibria that can be welfare-ranked. We construct and characterize these equilibria, showing how shifts between them can resemble changes in monetary policy objectives, even when preferences remain unchanged. We then explore several selection mechanisms—including self-enforceability, learning, partial commitment, and policy delegation—and assess whether coordination on the Pareto-preferred equilibrium is likely. A significant finding is that, for this quite standard New Keynesian model, not only are there multiple discretionary equilibria, but coordinating on the best equilibrium appears difficult and unlikely.