Monetary Policy Delegation and Equilibrium Coordination

25 Pages Posted: 27 Apr 2010 Last revised: 11 Apr 2013

See all articles by Andrew P. Blake

Andrew P. Blake

Bank of England - CCBS

Tatiana Kirsanova

University of Glasgow - Adam Smith Business School

Anthony Yates

Bank of England - Monetary Analysis

Multiple version iconThere are 2 versions of this paper

Date Written: April 25, 2013

Abstract

This paper revisits the argument that the stabilisation bias that arises under discretionary monetary policy can be reduced if policy is delegated to a policymaker with redesigned objectives. We study four delegation schemes: price level targeting, interest rate smoothing, speed limits and straight conservatism. These can all increase social welfare in models with a unique discretionary equilibrium. We investigate how these schemes perform in a model with capital accumulation where uniqueness does not necessarily apply. We discuss how multiplicity arises and demonstrate that no delegation scheme is able to eliminate all potential bad equilibria. Price level targeting has two interesting features. It can create a new equilibrium that is welfare dominated, but it can also alter equilibrium stability properties and make coordination on the best equilibrium more likely.

Keywords: Time Consistency, Discretion, Multiple Equilibria, Policy Delegation

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

Suggested Citation

Blake, Andrew P. and Kirsanova, Tatiana and Yates, Anthony, Monetary Policy Delegation and Equilibrium Coordination (April 25, 2013). Available at SSRN: https://ssrn.com/abstract=1595714 or http://dx.doi.org/10.2139/ssrn.1595714

Andrew P. Blake

Bank of England - CCBS ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Tatiana Kirsanova (Contact Author)

University of Glasgow - Adam Smith Business School ( email )

Glasgow, Scotland
United Kingdom

Anthony Yates

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

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