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Can the U.S. monetary policy fall (again) in an expectation trap?

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  • Roc Armenter
  • Martin Bodenstein

Abstract

We provide a tractable model to study monetary policy under discretion. We focus on Markov equilibria. For all parametrizations with an equilibrium inflation rate around 2%, there is a second equilibrium with an inflation rate just above 10%. Thus the model can simultaneously account for the low and high inflation episodes in the U.S. We carefully characterize the set of Markov equilibria along the parameter space and find our results to be robust.

Suggested Citation

  • Roc Armenter & Martin Bodenstein, 2006. "Can the U.S. monetary policy fall (again) in an expectation trap?," International Finance Discussion Papers 860, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:860
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    References listed on IDEAS

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    1. Roc Armenter & Martin Bodenstein, 2005. "Does the time inconsistency problem make flexible exchange rates look worse than you think?," Staff Reports 230, Federal Reserve Bank of New York.

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    Keywords

    Inflation (Finance) ; Econometric models ; Equilibrium (Economics) ; Monetary policy;

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