Monetary Policy with State Contingent Interest Rates

Pedro Teles (), Bernardino Adao and Isabel Correia

No 813, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: What instruments of monetary policy must be used in order to implement a unique equilibrium? This paper revisits the issues addressed by Poole (1970) and Sargent and Wallace (1975) on the multiplicity of equilibria when policy is conducted with either interest rate or money supply rules. We show that if monetary policy is conducted with both interest rates and money supplies as independent instruments it is possible to implement a unique equilibrium. This policy may require the government to set interest rates for all dates and states and in addition set exogenously the money supply every period in some, but not all, states. We show that an alternative policy that would implement a unique equilibrium sets exogenously the state contingent nominal interest rates as well as the initial money supply. These results hold whether prices are flexible or set in advance.

Keywords: Monetary policy; policy instruments; sticky prices; state-contingent interest rates. (search for similar items in EconPapers)
JEL-codes: E31 E40 E52 (search for similar items in EconPapers)
Date: 2004
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