Monetary Rules, Determinacy and Limited Enforcement
48 Pages Posted: 27 Nov 2018
Date Written: November 2018
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: Suggested Citation