Discretionary Policy, Multiple Equilibria, and Monetary Instruments

Andreas Schabert

No 5400, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper examines monetary policy implementation in a sticky price model. The central bank?s plan under discretionary optimization is entirely forward-looking and exhibits multiple equilibrium solutions if transactions frictions are not negligibly small. The central bank can then implement stable history dependent equilibrium sequences that are consistent with its plan by inertial interest rate adjustments or by money transfers. These equilibria can be associated with lower welfare losses than a forward-looking solution implemented by interest rate adjustments. The welfare gain from a history dependent implementation tends to rise with the strength of transactions frictions and the degree of price flexibility. It is further shown that the central bank?s plan can uniquely be implemented in a history dependent way by money transfers, whereas inertial interest rate adjustments cannot avoid equilibrium multiplicity.

Keywords: Monetary policy implementation; Optimal discretionary policy; History dependence; Equilibrium indeterminacy; Money growth policy (search for similar items in EconPapers)
JEL-codes: E32 E51 E52 (search for similar items in EconPapers)
Date: 2005-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://cepr.org/publications/DP5400 (application/pdf)

Related works:
Working Paper: Discretionary policy, multiple equilibria, and monetary instruments (2005)
Working Paper: Discretionary Policy, Multiple Equilibria, and Monetary Instruments (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:5400

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP5400

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().