The pitfalls of monetary discretion

Aubhik Khan (), Robert King () and Alexander L. Wolman ()

No 01-08, Working Paper from Federal Reserve Bank of Richmond

Abstract: In a canonical staggered pricing model, monetary discretion leads to multiple private sector equilibria. The basis for multiplicity is a form of policy complementarity. Specifically, prices set in the current period embed expectations about future policy, and actual future policy responds to these same prices. For a range of values of the fundamental state variable — a ratio of predetermined prices — there is complementarity between actual and expected policy, and multiple equilibria occur. Moreover, this multiplicity is not associated with reputational considerations: it occurs in a two-period model.

Keywords: Monetary policy; Prices; Equilibrium (Economics) (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-pke
Date: 2001
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