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Monetary policy delegation and equilibrium coordination

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  • Andrew P. Blake
  • Tatiana Kirsanova
  • Tony Yates

Abstract

This paper revisits the argument that the stabilisation bias that arises under discretionary monetary policy can be reduced if policy is delegated to a policymaker with redesigned objectives. We study four delegation schemes: price level targeting, interest rate smoothing, speed limits and straight conservatism. These can all increase social welfare in models with a unique discretionary equilibrium. We investigate how these schemes perform in a model with capital accumulation where uniqueness does not necessarily apply. We discuss how multiplicity arises and demonstrate that no delegation scheme is able to eliminate all potential bad equilibria. Price level targeting has two interesting features. It can create a new equilibrium that is welfare dominated, but it can also alter equilibrium stability properties and make coordination on the best equilibrium more likely.

Suggested Citation

  • Andrew P. Blake & Tatiana Kirsanova & Tony Yates, 2013. "Monetary policy delegation and equilibrium coordination," Working Papers 2013_09, Business School - Economics, University of Glasgow.
  • Handle: RePEc:gla:glaewp:2013_09
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    References listed on IDEAS

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    1. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(4), pages 1169-1189.
    2. Michael Woodford, 2005. "Firm-Specific Capital and the New Keynesian Phillips Curve," International Journal of Central Banking, International Journal of Central Banking, vol. 1(2), September.
    3. Carl Walsh, 2003. "Speed Limit Policies: The Output Gap and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 93(1), pages 265-278, March.
    4. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, vol. 87(1), pages 98-114, March.
    5. Dennis, Richard & Kirsanova, Tatiana, 2013. "Expectations Traps and Coordination Failures with Discretionary Policymaking," SIRE Discussion Papers 2013-18, Scottish Institute for Research in Economics (SIRE).
    6. Andrew P. Blake & Tatiana Kirsanova, 2012. "Discretionary Policy and Multiple Equilibria in LQ RE Models," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(4), pages 1309-1339.
    7. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    8. Russell Cooper & Andrew John, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(3), pages 441-463.
    9. Stefania Albanesi & V. V. Chari & Lawrence J. Christiano, 2003. "Expectation Traps and Monetary Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(4), pages 715-741.
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    11. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    12. Svensson, Lars E O, 1999. "Price-Level Targeting versus Inflation Targeting: A Free Lunch?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 277-295, August.
    13. Backus, David & Driffill, John, 1986. "The Consistency of Optimal Policy in Stochastic Rational Expectations Models," CEPR Discussion Papers 124, C.E.P.R. Discussion Papers.
    14. Sveen, Tommy & Weinke, Lutz, 2005. "New perspectives on capital, sticky prices, and the Taylor principle," Journal of Economic Theory, Elsevier, vol. 123(1), pages 21-39, July.
    15. Evans, George W., 1986. "Selection criteria for models with non-uniqueness," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 147-157, September.
    16. Batini, Nicoletta & Yates, Anthony, 2003. "Hybrid Inflation and Price-Level Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 283-300, June.
    17. Michael Woodford, 2003. "Optimal Interest-Rate Smoothing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(4), pages 861-886.
    18. Gilles Oudiz & Jeffrey Sachs, 1985. "International Policy Coordination in Dynamic Macroeconomic Models," NBER Chapters, in: International Economic Policy Coordination, pages 274-330, National Bureau of Economic Research, Inc.
    19. Vestin, David, 2006. "Price-level versus inflation targeting," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1361-1376, October.
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    Cited by:

    1. Taisuke Nakata & Sebastian Schmidt & Paul Yoo, 2018. "Speed Limit Policy and Liquidity Traps," IMES Discussion Paper Series 18-E-06, Institute for Monetary and Economic Studies, Bank of Japan.
    2. Volker Hahn, 2021. "Discretionary policy and multiple equilibria in a new Keynesian model," Oxford Economic Papers, Oxford University Press, vol. 73(1), pages 423-445.

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    More about this item

    Keywords

    Time Consistency; Discretion; Multiple Equilibria; Policy Delegation;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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