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Monetary Policy with Single Instrument Feedback Rules

  • Pedro Teles

    (Banco de Portugal, Universidade Catolica Portuguesa, and CEPR)

  • Isabel Correia

    (Banco de Portugal, Universidade Catolica Portuguesa and CEPR)

  • Bernardino Adao

    (Banco de Portugal)

We revisit the issue of multiplicity of equilibria when monetary policy is conducted with either the interest rate or the money supply as the sole instrument of policy. We show that in standard monetary models there are interest rate feedback rules, and also money supply rules, that implement a unique global equilibrium. This is a contribution to a literature that either concentrates on conditions for local determinacy, or criticizes that approach showing that local determinacy might be associated with global indeterminacy. The interest rate rules we propose are price targeting rules that respond to the forecasts of future economic activity and the future price level.

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Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 622.

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Date of creation: 2007
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Handle: RePEc:red:sed007:622
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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  1. Ben S. Bernanke & Michael Woodford, 1997. "Inflation Forecasts and Monetary Policy," NBER Working Papers 6157, National Bureau of Economic Research, Inc.
  2. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
  3. Lawrence J. Christiano & Massimo Rostagno, 2001. "Money Growth Monitoring and the Taylor Rule," NBER Working Papers 8539, National Bureau of Economic Research, Inc.
  4. McCallum, Bennett T., 1981. "Price level determinacy with an interest rate policy rule and rational expectations," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 319-329.
  5. Marco Bassetto, 2004. "Negative Nominal Interest Rates," American Economic Review, American Economic Association, vol. 94(2), pages 104-108, May.
  6. Benhabib, Jess & Schmitt-Grohé, Stephanie & Uribe, Martín, 1999. "Monetary Policy and Multiple Equilibria," CEPR Discussion Papers 2316, C.E.P.R. Discussion Papers.
  7. Bernardino Adao, 2000. "Gaps and Triangles," Econometric Society World Congress 2000 Contributed Papers 1904, Econometric Society.
  8. Loisel, O., 2006. "Bubble-free interest-rate rules," Working papers 161, Banque de France.
  9. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Taylor rules in a model that satisfies the natural rate hypothesis," Working Paper 0116, Federal Reserve Bank of Cleveland.
  10. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
  11. Bill Dupor, 2000. "Investment and Interest Rate Policy," Econometric Society World Congress 2000 Contributed Papers 0007, Econometric Society.
  12. Bernardino Adão & Isabel Horta Correia & Pedro Teles, 2004. "Monetary Policy with State Contingent Interest Rates," Working Papers w200418, Banco de Portugal, Economics and Research Department.
  13. Bernardino Ad�o & Isabel Correia & Pedro Teles, 2003. "Gaps and Triangles," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 699-713.
  14. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
  15. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 1998. "The perils of Taylor Rules," Departmental Working Papers 199831, Rutgers University, Department of Economics.
  16. Gaetano Bloise & Jacques Dréze & Herakles Polemarchakis, 2005. "Monetary equilibria over an infinite horizon," Economic Theory, Springer, vol. 25(1), pages 51-74, 01.
  17. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Timing and real indeterminacy in monetary models," Working Paper 9910R, Federal Reserve Bank of Cleveland.
  18. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
  19. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  20. Tomoyuki Nakajima & Herakles Polemarchakis, 2005. "Money and Prices Under Uncertainty," Review of Economic Studies, Oxford University Press, vol. 72(1), pages 223-246.
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