Sophisticated monetary policies

Andrew Atkeson, Varadarajan Chari and Patrick Kehoe

No 659, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: The Ramsey approach to policy analysis finds the best competitive equilibrium given a set of available instruments. This approach is silent about unique implementation, namely designing policies so that the associated competitive equilibrium is unique. This silence is particularly problematic in monetary policy environments where many ways of specifying policy lead to indeterminacy. We show that sophisticated policies which depend on the history of private actions and which can differ on and off the equilibrium path can uniquely implement any desired competitive equilibrium. A large literature has argued that monetary policy should adhere to the Taylor principle to eliminate indeterminacy. Our findings say that adherence to the Taylor principle on these grounds is unnecessary. Finally, we show that sophisticated policies are robust to imperfect information.

Keywords: Monetary policy; Taylor's rule (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Related works:
Journal Article: Sophisticated Monetary Policies (2010)
Working Paper: Sophisticated monetary policies (2009)
Working Paper: Sophisticated Monetary Policies (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:659

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