Sophisticated Monetary Policies

Andrew Atkeson, Varadarajan Chari () and Patrick J. Kehoe ()

No 14883, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In standard approaches to monetary policy, interest rate rules often lead to indeterminacy. Sophisticated policies, which depend on the history of private actions and can differ on and off the equilibrium path, can eliminate indeterminacy and uniquely implement any desired competitive equilibrium. Two types of sophisticated policies illustrate our approach. Both use interest rates as the policy instrument along the equilibrium path. But when agents deviate from that path, the regime switches, in one example to money; in the other, to a hybrid rule. Both lead to unique implementation, while pure interest rate rules do not. We argue that adherence to the Taylor principle is neither necessary nor sufficient for unique implementation with pure interest rate rules but is sufficient with hybrid rules. Our results are robust to imperfect information and may provide a rationale for empirical work on monetary policy rules and determinacy.

JEL-codes: E5 E52 E58 E6 E61 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2009-04
Note: EFG

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Related works:
Working Paper: Sophisticated monetary policies (2009)
Working Paper: Sophisticated monetary policies (2008)
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