Working Paper: NBER ID: w14883
Authors: Andrew Atkeson; V. V. Chari; Patrick Kehoe
Abstract: In standard approaches to monetary policy, interest rate rules often lead to indeterminacy. Sophisticated policies, which depend on the history of private actions and can differ on and off the equilibrium path, can eliminate indeterminacy and uniquely implement any desired competitive equilibrium. Two types of sophisticated policies illustrate our approach. Both use interest rates as the policy instrument along the equilibrium path. But when agents deviate from that path, the regime switches, in one example to money; in the other, to a hybrid rule. Both lead to unique implementation, while pure interest rate rules do not. We argue that adherence to the Taylor principle is neither necessary nor sufficient for unique implementation with pure interest rate rules but is sufficient with hybrid rules. Our results are robust to imperfect information and may provide a rationale for empirical work on monetary policy rules and determinacy.
Keywords: monetary policy; indeterminacy; competitive equilibrium
JEL Codes: E5; E52; E58; E6; E61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sophisticated policies (F13) | unique implementation of competitive equilibria (D59) |
| sophisticated policies (F13) | elimination of indeterminacy (C62) |
| adherence to the Taylor principle (E61) | unique implementation with hybrid rules (C69) |
| policy design (G52) | economic stability (E63) |
| imperfect information (D83) | unique implementation of competitive equilibria (D59) |