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Discretionary Policy and Multiple Equilibria in LQ RE Models

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  • Andrew P. Blake
  • Tatiana Kirsanova

Abstract

We study stationary discretionary equilibria in dynamic linear-quadratic rational expectations models. Past papers have assumed that this is uniquely determined; we show that such models can have multiple equilibria in some situations. We demonstrate the existence of multiple discretionary equilibria using a number of examples of increasing complexity and discuss their potential to explain interesting economic phenomena. We investigate the general properties of discretionary equilibria and discuss the design implications for the numerical algorithms needed to find them. Copyright , Oxford University Press.

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  • Andrew P. Blake & Tatiana Kirsanova, 2012. "Discretionary Policy and Multiple Equilibria in LQ RE Models," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(4), pages 1309-1339.
    • Handle: RePEc:oup:restud:v:79:y:2012:i:4:p:1309-1339
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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