Sophisticated Monetary Policies
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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Volume (Year): 125 (2010)
Issue (Month): 1 (February)
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