Monetary discretion, pricing complementarity and dynamic multiple equilibria

  • In a plain-vanilla New Keynesian model with two-period staggered price-setting, discretionary monetary policy leads to multiple equilibria. Complementarity between the pricing decisions of forward-looking firms underlies the multiplicity, which is intrinsically dynamic in nature. At each point in time, the discretionary monetary authority optimally accommodates the level of predetermined prices when setting the money supply because it is concerned solely about real activity. Hence, if other firms set a high price in the current period, an individual firm will optimally choose a high price because it knows that the monetary authority next period will accommodate with a high money supply. Under commitment, the mechanism generating complementarity is absent: the monetary authority commits not to respond to future predetermined prices. Multiple equilibria also arise in other similar contexts where (i) a policymaker cannot commit, and (ii) forward-looking agents determine a state variable to which future policy respond. JEL Klassifikation: E5, E61, D78

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Metadaten
Author:Robert G. King, Alexander L. Wolman
URN:urn:nbn:de:hebis:30-10732
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2004,22
Series (Serial Number):CFS working paper series (2004, 22)
Document Type:Working Paper
Language:English
Year of Completion:2004
Year of first Publication:2004
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2005/06/13
Tag:Complementarity; Discretion; Monetary Policy; Multiple Equilibria; Time-Consistency
GND Keyword:Preisstarrheit; Geldpolitik; Wirtschaftspolitik; Gleichgewichtstheorie
Issue:March 2004
HeBIS-PPN:222324481
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht