Discretionary policy, multiple equilibria, and monetary instruments

Andreas Schabert

No 533, Working Paper Series from European Central Bank

Abstract: This paper examines monetary policy implementation in a sticky price model. The central bank's plan under discretionary optimization is entirely forward-looking and exhibits multiple equilibrium solutions if transactions frictions are not negligibly small. The central bank can then implement stable history dependent equilibrium sequences that are consistent with its plan by inertial interest rate adjustments or by money injections. These equilibria are associated with lower welfare losses than a forward-looking solution implemented by interest rate adjustments. The welfare gain from a history dependent implementation is found to rise with the strength of transactions frictions and the degree of price flexibility. It is further shown that the central bank's plan can uniquely be implemented in a history dependent way by money injections, whereas inertial interest rate adjustments cannot avoid equilibrium multiplicity. JEL Classification: E52, E51, E32

Keywords: equilibrium indeterminacy; history dependence; monetary policy implementation; money growth policy.; optimal discretionary policy (search for similar items in EconPapers)
Date: 2005-10
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp533.pdf (application/pdf)

Related works:
Working Paper: Discretionary Policy, Multiple Equilibria, and Monetary Instruments (2005)
Working Paper: Discretionary Policy, Multiple Equilibria, and Monetary Instruments (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2005533

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().