Discretionary Policy and Multiple Equilibria in LQ RE Models

36 Pages Posted: 9 Nov 2006 Last revised: 20 Nov 2011

See all articles by Andrew P. Blake

Andrew P. Blake

Bank of England - CCBS

Tatiana Kirsanova

University of Glasgow - Adam Smith Business School

Date Written: November 18, 2011

Abstract

We study stationary discretionary equilibria in dynamic linear-quadratic rational expectations models. Past papers have assumed that this is uniquely determined; we show that such models can have multiple equilibria in some situations. We demonstrate the existence of multiple discretionary equilibria using a number of examples of increasing complexity, and discuss their potential to explain interesting economic phenomena. We investigate the general properties of discretionary equilibria and discuss the design implications for the numerical algorithms needed to find them.

Keywords: Time Consistency, Discretion, Multiple Equilibria, LQ RE models

JEL Classification: E31, E52, E58, E61, C61

Suggested Citation

Blake, Andrew P. and Kirsanova, Tatiana, Discretionary Policy and Multiple Equilibria in LQ RE Models (November 18, 2011). Available at SSRN: https://ssrn.com/abstract=943032 or http://dx.doi.org/10.2139/ssrn.943032

Andrew P. Blake

Bank of England - CCBS ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Tatiana Kirsanova (Contact Author)

University of Glasgow - Adam Smith Business School ( email )

Glasgow, Scotland
United Kingdom

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