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Sophisticated monetary policies

  • Andrew Atkeson
  • V. V. Chari
  • Patrick J. Kehoe

The Ramsey approach to policy analysis finds the best competitive equilibrium given a set of available instruments. This approach is silent about unique implementation, namely designing policies so that the associated competitive equilibrium is unique. This silence is particularly problematic in monetary policy environments where many ways of specifying policy lead to indeterminacy. We show that sophisticated policies which depend on the history of private actions and which can differ on and off the equilibrium path can uniquely implement any desired competitive equilibrium. A large literature has argued that monetary policy should adhere to the Taylor principle to eliminate indeterminacy. Our findings say that adherence to the Taylor principle on these grounds is unnecessary. Finally, we show that sophisticated policies are robust to imperfect information.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 659.

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Date of creation: 2008
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Handle: RePEc:fip:fedmwp:659
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