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Unique Monetary Equilibria with Interest Rate Rules

Author

Listed:
  • Bernardino Adao

    (Banco de Portugal)

  • Isabel Correia

    (Banco de Portugal)

  • Pedro Teles

    (Banco de Portugal)

Abstract

In contrast to previous literature, we show that it is possible to use interest rate rules in standard monetary models to implement equilibria that are globally unique. This is a contribution to a literature that either concentrates on conditions for local determinacy, or criticizes that approach showing that local determinacy might be associated with global indeterminacy. The interest rate rules we propose are price level targeting rules that respond to the forecasts of the future price level and future economic activity. (Copyright: Elsevier)

Suggested Citation

  • Bernardino Adao & Isabel Correia & Pedro Teles, 2011. "Unique Monetary Equilibria with Interest Rate Rules," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(3), pages 432-442, July.
    • Handle: RePEc:red:issued:09-172
    DOI: 10.1016/j.red.2009.11.003
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    References listed on IDEAS

    as
    1. John H. Cochrane, 2011. "Determinacy and Identification with Taylor Rules," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 565-615.
    2. Adão, Bernardino & Correia, Isabel & Teles, Pedro, 2014. "Short and long interest rate targets," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 95-107.
    3. Lawrence J. Christiano & Massimo Rostagno, 2001. "Money Growth Monitoring and the Taylor Rule," NBER Working Papers 8539, National Bureau of Economic Research, Inc.
    4. Andrew Atkeson & Varadarajan V. Chari & Patrick J. Kehoe, 2010. "Sophisticated Monetary Policies," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(1), pages 47-89.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Jeffrey Campbell & Jacob Weber, 2021. "Discretion rather than rules: Equilibrium uniqueness and forward guidance with inconsistent optimal plans," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 41, pages 243-254, July.
    2. repec:spo:wpmain:info:hdl:2441/1lu2rbsv0n8pkqid81q0tfof3f is not listed on IDEAS
    3. John H. Cochrane, 2011. "Determinacy and Identification with Taylor Rules," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 565-615.
    4. Correia, Isabel & Teles, Pedro & Tristani, Oreste & De Fiore, Fiorella, 2014. "Credit Spreads and Credit Policies," CEPR Discussion Papers 9989, C.E.P.R. Discussion Papers.
    5. Isabel Correia & Emmanuel Farhi & Juan Pablo Nicolini & Pedro Teles, 2013. "Unconventional Fiscal Policy at the Zero Bound," American Economic Review, American Economic Association, vol. 103(4), pages 1172-1211, June.
    6. Hall, Robert, 2016. "Achieving Price Stability by Manipulating the Central Bank's Payment on Reserves," CEPR Discussion Papers 11578, C.E.P.R. Discussion Papers.
    7. Adão, Bernardino & Correia, Isabel & Teles, Pedro, 2014. "Short and long interest rate targets," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 95-107.
    8. Kimbrough, Kent P., 2012. "Unique monetary equilibria with interest rate rules: An extension," Economics Letters, Elsevier, vol. 114(3), pages 332-334.
    9. repec:hal:spmain:info:hdl:2441/1lu2rbsv0n8pkqid81q0tfof3f is not listed on IDEAS
    10. Blake, Andrew P., 2012. "Equally shocking news," Economics Letters, Elsevier, vol. 117(3), pages 866-869.
    11. Tom D. Holden, 2024. "Robust Real Rate Rules," Econometrica, Econometric Society, vol. 92(5), pages 1521-1551, September.
    12. Narayana R. Kocherlakota, 2020. "21st Century Macro," NBER Working Papers 26791, National Bureau of Economic Research, Inc.
    13. Adão, Bernardino & Silva, André C., 2020. "The effect of firm cash holdings on monetary policy," European Economic Review, Elsevier, vol. 128(C).
    14. Mengus, Eric & Barthelemy, Jean, 2017. "Monetary Rules, Determinacy and Limited Enforcement," HEC Research Papers Series 1202, HEC Paris, revised 11 May 2019.
    15. Jean Barthélemy & Eric Mengus, 2017. "Credibility and Monetary Policy," Working Papers hal-03457527, HAL.
    16. Tom D. Holden, 2023. "Existence and Uniqueness of Solutions to Dynamic Models with Occasionally Binding Constraints," The Review of Economics and Statistics, MIT Press, vol. 105(6), pages 1481-1499, November.
    17. Dixon, Huw & Pourpourides, Panayiotis M., 2016. "On imperfect competition with occasionally binding cash-in-advance constraints," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 72-85.
    18. Canzoneri, Matthew & Cumby, Robert & Diba, Behzad, 2010. "The Interaction Between Monetary and Fiscal Policy," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 17, pages 935-999, Elsevier.
    19. Huberto M. Ennis, 2015. "Discussion on \"Scarcity of Safe Assets, Inflation, and the Policy Trap\" by Andolfatto and Williamson," Working Paper 15-3, Federal Reserve Bank of Richmond.
    20. Jean Barthélemy & Eric Mengus, 2017. "Credibility and Monetary Policy," Working Papers hal-03457527, HAL.
    21. Diba, Behzad & Loisel, Olivier, 2021. "Pegging the interest rate on bank reserves: A resolution of New Keynesian puzzles and paradoxes," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 230-244.
    22. Sofia Bauducco & Rodrigo Caputo, 2020. "Wicksellian Rules and the Taylor Principle: Some Practical Implications," Scandinavian Journal of Economics, Wiley Blackwell, vol. 122(1), pages 340-368, January.

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    More about this item

    Keywords

    Monetary policy; Interest rate rules; Price level targeting; Unique equilibrium;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • 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

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