Monetary discretion, pricing complementarity, and dynamic multiple equilibria

Robert King () and Alexander Wolman

No 04-05, Working Paper from Federal Reserve Bank of Richmond

Abstract: A discretionary policymaker responds to the state of the economy each period. Private agents' current behavior determines the future state based on expectations of future policy. Discretionary policy thus can lead to dynamic complementarity between private agents and a policymaker, which in turn can generate multiple equilibria. Working in a simple new Keynesian model with two-period staggered pricing ? in which equilibrium is unique under commitment ? we illustrate this interaction: if firms expect a high future money supply, (i) they will set a high current price and (ii) the future monetary authority will accommodate with a higher money supply, so as not to distort relative prices. We show that there are two point-in-time equilibria under discretion and we construct a related stochastic sunspot equilibrium.

Keywords: Monetary; policy (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 (95)

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Related works:
Journal Article: Monetary Discretion, Pricing Complementarity, and Dynamic Multiple Equilibria (2004)
Working Paper: Monetary discretion, pricing complementarity and dynamic multiple equilibria (2004)
Working Paper: Monetary discretion, pricing complementarity and dynamic multiple equilibria (2004)
Working Paper: Monetary discretion, pricing complementarity and dynamic multiple equilibria (2004)
Journal Article: Monetary discretion, pricing complementarity and dynamic multiple equilibria (2003)
Working Paper: Monetary Discretion, Pricing Complementarity and Dynamic Multiple Equilibria (2003)
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