Discretion rather than rules: Equilibrium uniqueness and forward guidance with inconsistent optimal plans

Jeffrey Campbell; Jacob P. Weber

doi:10.1016/j.red.2020.11.005

Discretion rather than rules: Equilibrium uniqueness and forward guidance with inconsistent optimal plans

Research output: Contribution to journal › Article › Scientific › peer-review

Abstract

New Keynesian economies with active interest rate rules gain equilibrium determinacy from the central bank's incredible off-equilibrium-path promises (Cochrane, 2011). We suppose instead that the central bank sets interest rate paths and occasionally has the discretion to change them. With empirically-reasonable frequencies of central bank reoptimization, the monetary policy game has a unique symmetric Markov-perfect equilibrium wherein forward guidance influences current outcomes without displaying a forward guidance puzzle.

Original language	English
Pages (from-to)	243-254
Journal	Review of Economic Dynamics
Volume	41
DOIs	https://doi.org/10.1016/j.red.2020.11.005
Publication status	Published - Jul 2021

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title = "Discretion rather than rules: Equilibrium uniqueness and forward guidance with inconsistent optimal plans",

abstract = "New Keynesian economies with active interest rate rules gain equilibrium determinacy from the central bank's incredible off-equilibrium-path promises (Cochrane, 2011). We suppose instead that the central bank sets interest rate paths and occasionally has the discretion to change them. With empirically-reasonable frequencies of central bank reoptimization, the monetary policy game has a unique symmetric Markov-perfect equilibrium wherein forward guidance influences current outcomes without displaying a forward guidance puzzle.",

author = "Jeffrey Campbell and Weber, \{Jacob P.\}",

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AB - New Keynesian economies with active interest rate rules gain equilibrium determinacy from the central bank's incredible off-equilibrium-path promises (Cochrane, 2011). We suppose instead that the central bank sets interest rate paths and occasionally has the discretion to change them. With empirically-reasonable frequencies of central bank reoptimization, the monetary policy game has a unique symmetric Markov-perfect equilibrium wherein forward guidance influences current outcomes without displaying a forward guidance puzzle.

U2 - 10.1016/j.red.2020.11.005

DO - 10.1016/j.red.2020.11.005

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JO - Review of Economic Dynamics

JF - Review of Economic Dynamics

ER -

Discretion rather than rules: Equilibrium uniqueness and forward guidance with inconsistent optimal plans

Abstract

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