Monetary Rules, Determinacy and Limited Enforcement
34 Pages Posted: 3 May 2017 Last revised: 20 Jun 2019
Date Written: June 18, 2019
We investigate the ability of monetary policy rules to implement a unique equilibrium outcome when the enforcement of rules is limited. We combine the approach of Bassetto (2005) and Atkeson et al. (2010) to study implementation and the one by Chari and Kehoe (1990) to allow policy deviations. Our main result is that, under limited enforcement, there does not exist a policy rule that implements a unique outcome: the private sector can always deter the central bank to stick to the rule. We then provide further results on implementation when private agents expect a given policy and when they hesitate between multiple policies.
Keywords: Policy rules, determinacy, limited enforcement
JEL Classification: E31, E52, E65
Suggested Citation: Suggested Citation