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Monetary policy delegation and equilibrium coordination

  • Andrew P. Blake
  • Tatiana Kirsanova
  • Tony Yates

This paper revisits the argument that the stabilisation bias that arises under discretionary monetary policy can be reduced if policy is delegated to a policymaker with redesigned objectives. We study four delegation schemes: price level targeting, interest rate smoothing, speed limits and straight conservatism. These can all increase social welfare in models with a unique discretionary equilibrium. We investigate how these schemes perform in a model with capital accumulation where uniqueness does not necessarily apply. We discuss how multiplicity arises and demonstrate that no delegation scheme is able to eliminate all potential bad equilibria. Price level targeting has two interesting features. It can create a new equilibrium that is welfare dominated, but it can also alter equilibrium stability properties and make coordination on the best equilibrium more likely.

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Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2013_09.

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Date of creation: Apr 2013
Date of revision:
Handle: RePEc:gla:glaewp:2013_09
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  1. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
  2. 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).
  3. Stefania Albanesi & V. V. Chari & Lawrence J. Christiano, 2003. "Expectation traps and monetary policy," Staff Report 319, Federal Reserve Bank of Minneapolis.
  4. Sveen, Tommy & Weinke, Lutz, 2005. "New perspectives on capital, sticky prices, and the Taylor principle," Journal of Economic Theory, Elsevier, vol. 123(1), pages 21-39, July.
  5. Dennis, Richard & Kirsanova, Tatiana, 2013. "Expectations Traps and Coordination Failures with Discretionary Policymaking," SIRE Discussion Papers 2013-18, Scottish Institute for Research in Economics (SIRE).
  6. Carl Walsh, 2003. "Speed Limit Policies: The Output Gap and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 93(1), pages 265-278, March.
  7. Andrew P. Blake & Tatiana Kirsanova, 2012. "Discretionary Policy and Multiple Equilibria in LQ RE Models," Review of Economic Studies, Oxford University Press, vol. 79(4), pages 1309-1339.
  8. Gilles Oudiz & Jeffrey Sachs, 1985. "International Policy Coordination in Dynamic Macroeconomic Models," NBER Chapters, in: International Economic Policy Coordination, pages 274-330 National Bureau of Economic Research, Inc.
  9. Michael Woodford, 2003. "Optimal Interest-Rate Smoothing," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 861-886.
  10. Evans, George W., 1986. "Selection criteria for models with non-uniqueness," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 147-157, September.
  11. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 441-63, August.
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