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On the Optimality of Delay in 'Monetary Policy As a Process of Search'

Matthew Doyle ()

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: Caplin and Leahy (1996) show that, when central bankers learn about the economy by observing its response to policy shock, cautious monetary policy may be ineffectual as private agents correctly anticipate that today's interest rate cuts are likely to be followed by future cuts. The central banker has to account for this strategic response of private agents to small interest rate cuts by acting more aggressively than would otherwise be the case. Caplin and Leahy, however, do not examine whether or not this strategic behavior on the part of private agents represents a constraint on the ability of monetary policy to implement optimal investment outcomes. The purpose of this paper is to show that the kinds of strategic interactions between investors and the central banker highlighted by Caplin and Leahy affect only the policy rule and do not influence the investment outcome in equilibrium.

Keywords: monetary policy; strategy delay (search for similar items in EconPapers)
JEL-codes: E50 (search for similar items in EconPapers)
Date: 2006-02-22
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-mon
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