Interest rate versus money supply instruments: on the implementation of Markov-perfect optimal monetary policy
Currently there is a growing literature exploring the features of optimal monetary policy in New Keynesian models under both commitment and discretion. With respect to time consistent policy, the literature focuses on solving for allocations. Recently, however, King and Wolman (2004) have examined implementation issues involved under time consistent policy when the monetary authority chooses nominal money balances. Surprisingly, they find that equilibria are no longer unique under a money stock regime. Indeed, there exist multiple steady states. Dotsey and Hornstein find that King and Wolman's conclusion of non-uniqueness of Markov-perfect equilibria is sensitive to the instrument of choice. If, instead, the monetary authority chooses the nominal interest rate rather than nominal money balances, there exists a unique Markov-perfect steady state and point-in-time equilibria are unique as well. Thus, in King and Wolman's language, monetary policy is implementable using an interest rate instrument while it is not implementable using a money stock instrument.
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References listed on IDEAS
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- Robert G. King & Alexander L. Wolman, 2004.
"Monetary Discretion, Pricing Complementarity, and Dynamic Multiple Equilibria,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 119(4), pages 1513-1553.
- Robert G. King & Alexander L. Wolman, 2003. "Monetary discretion, pricing complementarity and dynamic multiple equilibria," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
- Robert G. King & Alexander L. Wolman, 2003. "Monetary Discretion, Pricing Complementarity and Dynamic Multiple Equilibria," NBER Working Papers 9929, National Bureau of Economic Research, Inc.
- Robert G. King & Alexander L. Wolman, 2004. "Monetary discretion, pricing complementarity and dynamic multiple equilibria," International Finance Discussion Papers 802, Board of Governors of the Federal Reserve System (U.S.).
- Robert G. King & Alexander L. Wolman, 2004. "Monetary discretion, pricing complementarity, and dynamic multiple equilibria," Working Paper 04-05, Federal Reserve Bank of Richmond.
- King, Robert G. & Wolman, Alexander L., 2004. "Monetary discretion, pricing complementarity and dynamic multiple equilibria," CFS Working Paper Series 2004/22, Center for Financial Studies (CFS).
- King, Robert G. & Wolman, Alexander L., 2004. "Monetary discretion, pricing complementarity and dynamic multiple equilibria," Working Paper Series 0343, European Central Bank.
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- Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: I. General Theory," Levine's Bibliography 506439000000000384, UCLA Department of Economics.
- Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: I. General Theory," NBER Working Papers 9419, National Bureau of Economic Research, Inc.
- McCallum, Bennett T., 1983. "On non-uniqueness in rational expectations models : An attempt at perspective," Journal of Monetary Economics, Elsevier, vol. 11(2), pages 139-168.
- Bennett T. McCallum, 1981. "On Non-Uniqueness in Rational Expectations Models: An Attempt at Perspective," NBER Working Papers 0684, National Bureau of Economic Research, Inc.
- Alexander L. Wolman, 2001. "A primer on optimal monetary policy with staggered price-setting," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 27-52. Full references (including those not matched with items on IDEAS)
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