Discretionary Policy and Multiple Equilibria in a New Keynesian Model

Volker Hahn

No 2014-14, Working Paper Series of the Department of Economics, University of Konstanz from Department of Economics, University of Konstanz

Abstract: Focusing on linear-quadratic models with rational expectations, this paper extends the concept of discretionary equilibrium by allowing for linear non- Markovian strategies of the policy-maker and the other agents in the economy. Applying this concept to the standard New Keynesian framework, we show that a multitude of equilibria arise. Some equilibria have favorable consequences for welfare, resulting in outcomes superior even to those achieved under timelessperspective commitment. Compared to traditional approaches to modeling credibility through trigger strategies, our approach has the desirable implication that small mistakes of the policy-maker have only small consequences for his reputation. Finally, we show that our equilibrium concept can provide an alternative explanation for the high degree of inflation persistence found in the data.

Keywords: New Keynesian model; multiple equilibria; discretionary equilibrium; inflation persistence; reputation. (search for similar items in EconPapers)
JEL-codes: C61 E31 E52 E58 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2014-08-07
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Discretionary policy and multiple equilibria in a new Keynesian model (2021)
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