Monetary Rules, Determinacy and Limited Enforcement

48 Pages Posted: 27 Nov 2018

See all articles by Jean Barthelemy

Jean Barthelemy

Banque de France

Eric Mengus

HEC Paris - Economics & Decision Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: November 2018

Abstract

This paper investigates the ability of monetary policy rules to coordinate private agents' expectations when the enforcement of rules is limited. We show that limited enforcement precludes diverging inflation paths ensuring that nominal variables remain bounded in equilibrium. When applied to Taylor rules this makes the Taylor principle necessary and sufficient for price determinacy. However, limited enforcement also allows agents to rationally anticipate multiple policies and we show that, in general, there is no policy rule able to recoordinate any private agents' belief on that rule. We finally provide conditions under which such recoordination may take place.

Keywords: Policy Rules, Determinacy, Limited Enforcement

JEL Classification: E31 ; E52 ; E65

Suggested Citation

Barthelemy, Jean and Mengus, Eric, Monetary Rules, Determinacy and Limited Enforcement (November 2018). Banque de France Working Paper No. 700. Available at SSRN: https://ssrn.com/abstract=3288544 or http://dx.doi.org/10.2139/ssrn.3288544

Jean Barthelemy (Contact Author)

Banque de France ( email )

Paris
France

Eric Mengus

HEC Paris - Economics & Decision Sciences ( email )

Paris
France

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