On the Implementation of Markov-Perfect Interest Rate and Money Supply Rules: Global and Local Uniqueness

33 Pages Posted: 1 Nov 2007 Last revised: 11 Feb 2009

See all articles by Michael Dotsey

Michael Dotsey

Federal Reserve Bank of Philadelphia

Andreas Hornstein

Federal Reserve Bank of Richmond

Date Written: December 5, 2008

Abstract

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. 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 just announcing his policy rule in a decentralized setting.

Suggested Citation

Dotsey, Michael and Hornstein, Andreas, On the Implementation of Markov-Perfect Interest Rate and Money Supply Rules: Global and Local Uniqueness (December 5, 2008). FRB of Philadelphia Working Paper No. 08-30. Available at SSRN: https://ssrn.com/abstract=1025581 or http://dx.doi.org/10.2139/ssrn.1025581

Michael Dotsey (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
804-697-8201 (Phone)
804-697-8255 (Fax)

Andreas Hornstein

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States
804-697-8266 (Phone)
804-697-8255 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
83
Abstract Views
943
rank
300,571
PlumX Metrics