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Open Mouth Operations

Jeffrey Campbell () and Jacob P. Weber
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Jacob P. Weber: Federal Reserve Bank of Chicago

No WP-2018-3, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: We examine the standard New Keynesian economy’s Ramsey problem written in terms of instrument settings instead of allocations. Its standard formulation makes two instruments available: the path of current and future interest rates, and an “open mouth operation” which selects one of the many equilibria consistent with the chosen interest rates. Removing the open mouth operation by imposing a finite commitment horizon yields pathological policy advice that relies on the model's forward guidance puzzle.

Keywords: Keynesian economics; equilibrium multiplicity; monetary policy; open market operations (search for similar items in EconPapers)
JEL-codes: E12 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
Date: 2018-02-05
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