Monetary Policy with State Contingent Interest Rates

Pedro Teles, Isabel Correia () and Bernardino Adao

No 960, 2009 Meeting Papers from Society for Economic Dynamics

Abstract: Under a monetary policy rule for the nominal interest rate, i.e. the return on risk-free short-term nominal bonds, there may be a unique local equilibrium, but there are in general multiple global equilibria. We show that the appropriate interest rate instruments under uncertainty are state-contingent interest rates, i.e. the nominal returns on state-contingent nominal assets. A policy that pegs the state-contingent interest rates implements a unique equilibrium globally. This policy is particularly relevant at the zero bound.

Date: 2009
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Related works:
Working Paper: Monetary policy with state contingent interest rates (2004)
Working Paper: Monetary Policy with State Contingent Interest Rates (2004)
Working Paper: Monetary Policy with State Contingent Interest Rates (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed009:960

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