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Instruments of Monetary Policy

Author

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  • Bernardino Adão
  • Pedro Teles

Abstract

How can a particular allocation and prices be implemented? Under what conditions does a policy deliver a unique competitive equilibrium? How many degrees of freedom there are in the determination of the policy variables, or how many are the instruments of policy? In this paper we analyze a standard dynamic general equilibrium monetary model and determine the conditions on fiscal and monetary policy under which there is single equilibrium. We first obtain that in general, when taxes are chosen in order to satisfy the government budget constraint for all prices and quantities, policy must include exogenous rules for both money supply and interest rates in order for there to be a single equilibrium. However, there are particular interest rate feedback rules, or money supply rules, that guarantee a unique equilibrium. We consider alternative fiscal policy rules and extend the analysis to environments with sticky prices. We obtain similar results for particular restrictions on the setting of prices
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Suggested Citation

  • Bernardino Adão & Pedro Teles, 2004. "Instruments of Monetary Policy," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:bdpart:b200405
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    References listed on IDEAS

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    1. Obstfeld, Maurice & Rogoff, Kenneth, 1983. "Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 675-687, August.
    2. Bernardino Adão & Isabel Correia & Pedro Teles, 2003. "Gaps and Triangles," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(4), pages 699-713.
    3. Bernardino Adao & Isabel Correia, 2004. "Instruments of Monetary Policy," 2004 Meeting Papers 164, Society for Economic Dynamics.
    4. Roger E. A. Farmer, 1999. "Macroeconomics of Self-fulfilling Prophecies, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062038, December.
    5. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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    Cited by:

    1. Rhee, Hyuk Jae & Turdaliev, Nurlan, 2013. "Central bank transparency: Does it matter?," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 183-197.
    2. Hyuk Rhee & Nurlan Turdaliev, 2015. "Central bank policy instrument forecasts," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 10(2), pages 221-245, October.
    3. Bernardino Adao & Isabel Correia, 2004. "Instruments of Monetary Policy," 2004 Meeting Papers 164, Society for Economic Dynamics.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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