Sustainable Monetary Policy and Expectations

Roc Armenter ()

No 183, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: Infinitely repeated games have been used to argue that reputation can substitute for commitment in monetary policymaking. A drawback of this approach is that it implies multiple equilibria. I argue that nominal asset prices can be used as an equilibrium selection mechanism. First, I introduce real and nominal asset trading in a way that preserves the full equilibrium set. I then analyze the subset of sustainable policies compatible with a given asset price schedule. I show that the best sustainable monetary policy is implemented if and only if the short term nominal bond is priced at a certain value at date t=0. Hence, if the monetary authority is a price-setter in the short term nominal bond market at date t=0, it can effectively coordinate expectations on the best sustainable policy. However, if the monetary authority can set nominal asset prices at all dates, then the equilibrium set collapses to the subset of one-period equilibria

Keywords: Monetary Policy; Reputation; Equilibrium Selection (search for similar items in EconPapers)
JEL-codes: E52 E58 E61 (search for similar items in EconPapers)
Date: 2006-12-03

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Persistent link: http://EconPapers.repec.org/RePEc:red:sed006:183

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