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Sophisticated Monetary Policies

  • Andrew Atkeson

    (University of California, Los Angeles, Federal Reserve Bank of Minneapolis, and National Bureau of Economic Research.)

  • Varadarajan V. Chari

    (University of Minnesota and Federal Reserve Bank of Minneapolis.)

  • Patrick J. Kehoe

    (Federal Reserve Bank of Minneapolis, University of Minnesota, and National Bureau of Economic Research.)

In standard monetary policy approaches, interest-rate rules often produce indeterminacy. A sophisticated policy approach does not. Sophisticated policies depend on the history of private actions, government policies, and exogenous events and can differ on and off the equilibrium path. They can uniquely implement any desired competitive equilibrium. When interest rates are used along the equilibrium path, implementation requires regime-switching. These results are robust to imperfect information. Our results imply that the Taylor principle is neither necessary nor sufficient for unique implementation. They also provide a direction for empirical work on monetary policy rules and determinacy. (c) 2010 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology..

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Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 125 (2010)
Issue (Month): 1 (February)
Pages: 47-89

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Handle: RePEc:tpr:qjecon:v:125:y:2010:i:1:p:47-89
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  1. David Backus & John Driffill, 1984. "Inflation and Reputation," Working Papers 560, Queen's University, Department of Economics.
  2. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  3. Bennett T. McCallum, 1980. "Price Level Determinacy with an Interest Rate Policy Rule and Rational Expectations," NBER Working Papers 0559, National Bureau of Economic Research, Inc.
  4. Pedro Teles & Isabel Correia & Bernardino Adao, 2007. "Monetary Policy with Single Instrument Feedback Rules," 2007 Meeting Papers 622, Society for Economic Dynamics.
  5. Maurice Obstfeld & Kenneth Rogoff, 1981. "Speculative hyperinflations in a maximizing models: can we rule them out?," International Finance Discussion Papers 195, Board of Governors of the Federal Reserve System (U.S.).
  6. John H. Cochrane, 2007. "Determinacy and Identification with Taylor Rules," NBER Working Papers 13409, National Bureau of Economic Research, Inc.
  7. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  8. Marco Bassetto, 2000. "A Game-Theoretic View of the Fiscal Theory of the Price Level," Econometric Society World Congress 2000 Contributed Papers 1492, Econometric Society.
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