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On the Optimality of Delay in 'Monetary Policy As a Process of Search'

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  • Doyle, Matthew

Abstract

Caplin and Leahy (1996) show that, when central bankers learn about the economy by observing its response to policy shock, cautious monetary policy may be ineffectual as private agents correctly anticipate that today's interest rate cuts are likely to be followed by future cuts. The central banker has to account for this strategic response of private agents to small interest rate cuts by acting more aggressively than would otherwise be the case. Caplin and Leahy, however, do not examine whether or not this strategic behavior on the part of private agents represents a constraint on the ability of monetary policy to implement optimal investment outcomes. The purpose of this paper is to show that the kinds of strategic interactions between investors and the central banker highlighted by Caplin and Leahy affect only the policy rule and do not influence the investment outcome in equilibrium.

Suggested Citation

  • Doyle, Matthew, 2006. "On the Optimality of Delay in 'Monetary Policy As a Process of Search'," Staff General Research Papers Archive 12503, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:12503
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    File URL: http://www2.econ.iastate.edu/papers/p3846-2006-02-22.pdf
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    References listed on IDEAS

    as
    1. Caplin, Andrew & Leahy, John, 1996. "Monetary Policy as a Process of Search," American Economic Review, American Economic Association, vol. 86(4), pages 689-702, September.
    2. Yetman, James, 2003. "Probing potential output: Monetary policy, credibility, and optimal learning under uncertainty," Journal of Macroeconomics, Elsevier, vol. 25(3), pages 311-330, September.
    3. Heinz-Peter Spahn, 2001. "On the theory of interest rate policy," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 54(219), pages 355-380.
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    More about this item

    Keywords

    monetary policy; strategy delay;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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