Working Papers

2001

 

October 2001, No. 01-8

The Pitfalls of Monetary Discretion

Aubhik Khan, Robert G. King and Alexander L. Wolman

In a canonical staggered pricing model, monetary discretion leads to multiple private sector equilibria. The basis for multiplicity is a form of policy complementarity. Specifically, prices set in the current period embed expectations about future policy, and actual future policy responds to these same prices. For a range of values of the fundamental state variable — a ratio of predetermined prices — there is complementarity between actual and expected policy, and multiple equilibria occur. Moreover, this multiplicity is not associated with reputational considerations: it occurs in a two-period model.



Our Research Focus: Inflation & Monetary Policy

Topics: Monetary Policy
Contact Us

Richmond

Lisa Kenney
(804) 697-8179