Discretion Rather than Rules: Equilibrium Uniqueness and Forward Guidance with Inconsistent Optimal Plans

Jeffrey Campbell and Jacob Weber ()

No WP-2018-14, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: New Keynesian economies with active interest rate rules gain equilibrium determinacy from the central bank?s incredible off-equilibrium-path promises (Cochrane, 2011). We suppose instead that the central bank sets interest rate paths and occasionally has the discretion to change them. Private agents taking future central bank actions and their own best responses to them as given reduces the scope for self-fulfilling prophecies. With empirically-reasonable frequencies of central-bank reoptimization, the monetary-policy game has a unique Markov-perfect equilibrium wherein forward guidance influences current outcomes without displaying a forward-guidance puzzle.

Keywords: Keynesian economics; Markov processes; Money policy; Open Market Operations (search for similar items in EconPapers)
JEL-codes: E12 E52 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2018-09-07
New Economics Papers: this item is included in nep-cba, nep-gth, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Journal Article: Discretion rather than rules: Equilibrium uniqueness and forward guidance with inconsistent optimal plans (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedhwp:wp-2018-14

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DOI: 10.21033/wp-2018-14

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