Federal Reserve Bank of Minneapolis,

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Federal Reserve Bank of Minneapolis, (2008)

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by Andrew Atkeson , V. V. Chari , Patrick J. Kehoe

BibTeX

@MISC{Atkeson08federalreserve,
    author = {Andrew Atkeson and V. V. Chari and Patrick J. Kehoe},
    title = {Federal Reserve Bank of Minneapolis,},
    year = {2008}
}

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Abstract

The Ramsey approach to policy analysis finds the best competitive equilibrium given a set of available instruments but is silent about unique implementation, namely, designing policies so that the associated competitive equilibrium is unique. This silence is particularly problematic in monetary policy environments, where many ways of specifying policy lead to indeterminacy. We show that sophisticated policies, whichdependonthehistoryofprivateactionsandcandiffer on and off the equilibrium path, can uniquely implement any desired competitive equilibrium. A large literature has argued that monetary policy should adhere to the Taylor principle to eliminate indeterminacy. We show that adherence to the Taylor principle on these grounds is unnecessary for either determinacy or efficiency. We also show that sophisticated policies are robust to imperfect information. Atkeson, Chari, and Kehoe thank the National Science Foundation for financial support and Kathleen Rolfe for excellent editorial assistance. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. The now-classic Ramsey (1927) approach to policy analysis under commitment specifies the set of instruments available to policymakers and finds the competitive equilibrium outcomes that maximize social welfare with those available instruments. The Ramsey approach

Keyphrases

federal reserve bank ramsey approach taylor principle policy analysis sophisticated policy available instrument social welfare financial support national science foundation competitive equilibrium policy lead excellent editorial assistance equilibrium path large literature monetary policy competitive equilibrium outcome federal reserve system many way kathleen rolfe monetary policy environment associated competitive equilibrium now-classic ramsey desired competitive equilibrium commitment specifies unique implementation

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