Optimal monetary policy and determinacy under active/passive regimes
European Economic Review, 2020, vol. 130, issue C
Should one expect inflation to be stable when monetary policy is passive? According to the workhorse model for monetary policy analysis, the answer should be no if the passive spell is too long. In this paper, I develop a New Keynesian model in which monetary policy is optimal subject to a loose commitment constraint. I show that there is a threshold degree of commitment such that the equilibrium is locally unique when monetary policy switches between active and passive stances, regardless of the length of the passive spell. This result also holds for a version of the model where the passive spell is endogenous and due to a demand shock driving the economy to the Zero Lower Bound.
JEL-codes: E31 E32 E52 E58 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:130:y:2020:i:c:s0014292120302129
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