English, Article, Journal or magazine article edition: On the implementation of Markov-Perfect interest rate and money supply rules : global and local uniqueness Michael Dotsey; Andreas Hornstein

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Bookmark: http://trove.nla.gov.au/version/75042
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • On the implementation of Markov-perfect interest rate and money supply rules: global and local uniqueness
Author
  • Michael Dotsey
  • Andreas Hornstein
Physical Description
  • preprint
Notes
  • Currently there is a growing literature exploring the features of optimal monetary policy in New Keynesian models under both commitment and discretion. This literature usually solves for the optimal allocations that are consistent with a rational expectations market equiibrium, but it does not study how the policy can be implemented given the available policy instruments. Recently, however, King and Wolman (2004) have shown that a time-consistent policy cannot be implemented through the control of nominal money balances. In particular, they find that equilibria are not unique under a money stock regime. We find that their conclusion of non-uniqueness of Markov-perfect equilibria is sensitive to the instrument of choice. Surprisingly, if, instead, the monetary authority chooses the nominal interest rate, there exists a unique Markov-perfect equilibrium. We then investigate under what conditions a time-consistent planner can implement the optimal allocation by simply announcing his policy rule in a decentralized setting.
  • Monetary policy ; Interest rates
  • RePEc:fip:fedrwp:09-06
  • Currently there is a growing literature exploring the features of optimal monetary policy in New Keynesian models under both commitment and discretion. This literature usually solves for the optimal allocations that are consistent with a rational expectations market equilibrium, but it does not study how the policy can be implemented given the available policy instruments. Recently, however, King and Wolman (2004) have shown that a time-consistent policy cannot be implemented through the control of nominal money balances. In particular, they find that equilibria are not unique under a money stock regime. The authors of this paper find that King and Wolman's conclusion of non-uniqueness of Markov-perfect equilibria is sensitive to the instrument of choice. Surprisingly, if, instead, the monetary authority chooses the nominal interest rate there exists a unique Markov-perfect equilibrium. The authors then investigate under what conditions a time-consistent planner can implement the optimal allocation by just announcing his policy rule in a decentralized setting.
  • Markov processes
  • RePEc:fip:fedpwp:08-30
Language
  • English
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