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Monetary Policy with State Contingent Interest Rates

  • Pedro Teles

    (Banco de Portugal, Universidade Catolica Portuguesa and CEPR)

  • Isabel Correia

    (Banco de Portugal, Universidade Catolica Portuguesa and CEPR)

  • Bernardino Adão

    (Banco de Portugal)

Under a monetary policy rule for the nominal interest rate, i.e. the return on risk-free short-term nominal bonds, there may be a unique local equilibrium, but there are in general multiple global equilibria. We show that the appropriate interest rate instruments under uncertainty are state-contingent interest rates, i.e. the nominal returns on state-contingent nominal assets. A policy that pegs the state-contingent interest rates implements a unique equilibrium globally. This policy is particularly relevant at the zero bound.

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Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 960.

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Date of creation: 2009
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Handle: RePEc:red:sed009:960
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  1. Benhabib, Jess & Schmitt-Grohe, Stephanie & Uribe, Martin, 1998. "The Perils of Taylor Rules," Working Papers 98-37, C.V. Starr Center for Applied Economics, New York University.
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  7. Bernardino Adao, 2000. "Gaps and Triangles," Econometric Society World Congress 2000 Contributed Papers 1904, Econometric Society.
  8. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: I. General Theory," Levine's Bibliography 506439000000000384, UCLA Department of Economics.
  9. Lawrence J. Christiano & Massimo Rostagno, 2001. "Money Growth Monitoring and the Taylor Rule," NBER Working Papers 8539, National Bureau of Economic Research, Inc.
  10. Juan Pablo Nicolini & Francisco Buera, 2002. "Optimal Maturity of Governement Debt without state contingent bonds," Department of Economics Working Papers 016, Universidad Torcuato Di Tella.
  11. Michael Woodford, 2003. "Optimal Interest-Rate Smoothing," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 861-886.
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  13. Carlstrom, Charles T. & Fuerst, Timothy S., 2001. "Timing and real indeterminacy in monetary models," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 285-298, April.
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  15. Bernardino Adão & Isabel Correia & Pedro Teles, 2003. "Gaps and Triangles," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 699-713.
  16. Rosie Smith & Christos Staikouras & Geoffrey Wood, 2003. "Non-interest income and total income stability," Bank of England working papers 198, Bank of England.
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