Monetary policy with state contingent interest rates

Bernardino Adao (), Isabel Correia () and Pedro Teles

No WP-04-26, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: What instruments of monetary policy must be used in order to implement a unique equilibrium? This paper revisits the issues addressed by Sargent and Wallace (1975) on the multiplicity of equilibria when policy is conducted with interest rate rules. 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 state-contingent nominal interest rates, and sets the initial money supply, implements a unique equilibrium. These results hold whether prices are flexible or set in advance.

Keywords: Monetary policy; Interest rates (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Monetary Policy with State Contingent Interest Rates (2009)
Working Paper: Monetary Policy with State Contingent Interest Rates (2004)
Working Paper: Monetary Policy with State Contingent Interest Rates (2004)
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