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

Author

Listed:
  • Jeffrey Campbell

    (Notre Dame University)

  • Jacob Weber

    (University of California, Berkeley)

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 Markov-perfect equilibrium wherein forward guidance influences current outcomes without displaying a forward guidance puzzle. (Copyright: Elsevier)

Suggested Citation

  • 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.
    • Handle: RePEc:red:issued:20-28
    DOI: 10.1016/j.red.2020.11.005
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    Cited by:

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    2. Campbell, Jeffrey R. & Ferroni, Filippo & Fisher, Jonas D.M. & Melosi, Leonardo, 2019. "The limits of forward guidance," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 118-134.
    3. Mengus, Eric & Barthelemy, Jean, 2017. "Monetary Rules, Determinacy and Limited Enforcement," HEC Research Papers Series 1202, HEC Paris, revised 11 May 2019.
    4. Jeffrey R. Campbell & Jacob P. Weber, 2018. "Open Mouth Operations," Working Paper Series WP-2018-3, Federal Reserve Bank of Chicago.
    5. Alexander Mechanick & Jacob P. Weber, 2024. "The Countercyclical Benefits of Regulatory Costs," Staff Reports 1109, Federal Reserve Bank of New York.

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    More about this item

    Keywords

    Monetary policy; Open mouth operations; Quasi-commitment; Ramsey problem;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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