Monetary Policy and Global Equilibria in a Production Economy

21 Pages Posted: 18 Dec 2012

See all articles by Tim Hursey

Tim Hursey

Federal Reserve Banks - Federal Reserve Bank of Richmond

Alexander L. Wolman

Federal Reserve Bank of Richmond

Date Written: 2010

Abstract

In linear macroeconomic models, an active Taylor rule for monetary policy can guarantee a locally unique nonexplosive equilibrium. In a series of articles, Benhabib, Schmitt-Grohé, and Uribe looked beyond the local dynamics and showed that active Taylor rules could interact with the zero bound on nominal interest rates to generate multiple equilibria, including a steady-state equilibrium with inflation below target. Recently, the persistence of low inflation and low nominal interest rates has brought attention to Benhabib, Schmitt-Grohé, and Uribe's work in policy circles. We provide an introduction to this line of research. The specific model used here — Rotemberg price setting in discrete time — fits neatly into the frameworks typically used for applied monetary policy analysis. Furthermore, we provide computer programs in the open source software R to replicate the results in the paper.

Suggested Citation

Hursey, Tim and Wolman, Alexander L., Monetary Policy and Global Equilibria in a Production Economy (2010). FRB Richmond Economic Quarterly, vol. 96, no. 4, Fourth Quarter 2010, pp. 317-337. Available at SSRN: https://ssrn.com/abstract=2189095

Tim Hursey

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

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

Alexander L. Wolman (Contact Author)

Federal Reserve Bank of Richmond ( email )

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

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