Monetary Discretion, Pricing Complementarity, and Dynamic Multiple Equilibria

49 Pages Posted: 5 Dec 2012

See all articles by Robert G. King

Robert G. King

Boston University - Department of Economics; Federal Reserve Bank of Richmond - Research Department; National Bureau of Economic Research (NBER)

Alexander L. Wolman

Federal Reserve Bank of Richmond

Multiple version iconThere are 4 versions of this paper

Date Written: June 1, 2004

Abstract

A discretionary policymaker responds to the state of the economy each period. Private agents' current behavior determines the future state based on expectations of future policy. Discretionary policy thus can lead to dynamic complementarity between private agents and a policymaker, which in turn can generate multiple equilibria. Working in a simple new Keynesian model with two-period staggered pricing — in which equilibrium is unique under commitment — we illustrate this interaction: if firms expect a high future money supply, (i) they will set a high current price and (ii) the future monetary authority will accommodate with a higher money supply, so as not to distort relative prices. We show that there are two point-in-time equilibria under discretion and we construct a related stochastic sunspot equilibrium.

Keywords: monetary policy, discretion, time-consistency, multiple equilibria, complementarity

JEL Classification: D78, E5, E61, E78

Suggested Citation

King, Robert G. and Wolman, Alexander L., Monetary Discretion, Pricing Complementarity, and Dynamic Multiple Equilibria (June 1, 2004). FRB Richmond Working Paper No. 04-05. Available at SSRN: https://ssrn.com/abstract=2184949 or http://dx.doi.org/10.2139/ssrn.2184949

Robert G. King

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States
617-353-5941 (Phone)

Federal Reserve Bank of Richmond - Research Department

P.O. Box 27622
Richmond, VA 23261
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alexander L. Wolman (Contact Author)

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
9
Abstract Views
493
PlumX Metrics