Instruments of Monetary Policy
How can a particular allocation and prices be implemented? Under what conditions does a policy deliver a unique competitive equilibrium? How many degrees of freedom there are in the determination of the policy variables, or how many are the instruments of policy? In this paper we analyze a standard dynamic general equilibrium monetary model and determine the conditions on fiscal and monetary policy under which there is single equilibrium. We first obtain that in general, when taxes are chosen in order to satisfy the government budget constraint for all prices and quantities, policy must include exogenous rules for both money supply and interest rates in order for there to be a single equilibrium. However, there are particular interest rate feedback rules, or money supply rules, that guarantee a unique equilibrium. We consider alternative fiscal policy rules and extend the analysis to environments with sticky prices. We obtain similar results for particular restrictions on the setting of prices
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Volume (Year): (2004)
Issue (Month): ()
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- Bernardino Adão & Isabel Correia & Pedro Teles, 2003.
"Gaps and Triangles,"
Review of Economic Studies,
Oxford University Press, vol. 70(4), pages 699-713.
- Bernardino Adão & Isabel Horta Correia & Pedro Teles, 2001. "Gaps and Triangles," Working Papers w200102, Banco de Portugal, Economics and Research Department.
- Adão, Bernardino & Correia, Isabel & Teles, Pedro, 2001. "Gaps and Triangles," CEPR Discussion Papers 2668, C.E.P.R. Discussion Papers.
- Bernardino Adão & Isabel Correia & Pedro Teles, 2001. "Gaps and triangles," Working Paper Series WP-01-13, Federal Reserve Bank of Chicago.
- Roger E. A. Farmer, 1999. "Macroeconomics of Self-fulfilling Prophecies, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062038, July.
- Bernardino Adão & Isabel Horta Correia & Pedro Teles, 2004. "Instruments of Monetary Policy," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.