'Wet' or 'Impatient'? New Perspective on Discretionary Monetary Policymaking

22 Pages Posted: 25 Mar 2008

See all articles by Andrew P. Blake

Andrew P. Blake

Bank of England - CCBS

Tatiana Kirsanova

University of Glasgow

Date Written: January 8, 2008


We demonstrate the existence of multiple discretionary equilibria in a mainstream New Keynesian model with capital accumulation. There can be two monetary policy regimes, both of which satisfy conditions of optimality and time consistency. In a response to a cost-push shock one of the regimes can be characterised by large initial investment movements and slow adjustment of the capital stock back to the steady state that requires high interest rate, low inflation and large recession. The second regime does not allow large investment movements and delivers fast stabilisation of capital stock, but the policymaker has to create high inflation and small recession. Depending on the private sector's beliefs about the course of future policy one of these regimes prevails. These results imply that even a high relative weight on inflation stabilisation in policymaker's objectives cannot guarantee a "tough-on-inflation" discretionary policy. They also imply that most of proposed solutions to the "problem of optimal delegation" might have failed to deal with the problem of multiplicity.

Keywords: Time Consistency, Discretion, Multiple Equilibria

JEL Classification: E31, E52, E58, E61, C61

Suggested Citation

Blake, Andrew P. and Kirsanova, Tatiana, 'Wet' or 'Impatient'? New Perspective on Discretionary Monetary Policymaking (January 8, 2008). Available at SSRN: https://ssrn.com/abstract=1111661 or http://dx.doi.org/10.2139/ssrn.1111661

Andrew P. Blake

Bank of England - CCBS ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Tatiana Kirsanova (Contact Author)

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

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