Hostname: page-component-7f64f4797f-bnl7t Total loading time: 0 Render date: 2025-11-04T15:41:23.464Z Has data issue: false hasContentIssue false
  • English
  • Français

CAN THE U.S. MONETARY POLICY FALL (AGAIN) IN AN EXPECTATION TRAP?

Published online by Cambridge University Press:  01 November 2008

Roc Armenter  and
Martin Bodenstein
Roc Armenter*
Affiliation:
Federal Reserve Bank of New York
Martin Bodenstein
Affiliation:
Board of Governors of the Federal Reserve System
*
Address correspondence to: Roc Armenter, International Research Function, Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045, USA; e-mail: roc.armenter@ny.frb.org.
Get access Rights & Permissions [Opens in a new window]

Abstract

We propose a model to study monetary policy under discretion. We focus on Markov perfect equilibria, ruling out trigger strategies. The model is simple enough that the determinants of monetary policy under discretion are clear. We also find that for all parameterizations with an equilibrium inflation rate around 2%, there is a second equilibrium with an inflation rate just above 10%. Thus the model can simultaneously account for the low- and high-inflation episodes in the U.S. experience.

Keywords

Time inconsistencyInflationExpectation traps

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 12 , Issue 5 , November 2008 , pp. 664 - 693
Copyright
Copyright © Cambridge University Press 2008

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

References

REFERENCES

Albanesi, S., Chari, V., and Christiano, L. J. (2003, Expectation traps and monetary policy. Review of Economic Studies 70 (4), 715–742.Google Scholar
Altonji, J. (1986) Intertemporal labor supply: Evidence from micro data. Journal of Political Economy 94 (3), 176–215.CrossRefGoogle Scholar
Armenter, R. (forthcoming) A general theory (and some evidence) of expectation traps in monetary policy. Journal of Money, Credit and Banking.Google Scholar
Armenter, R. and Bodenstein, M. (2005a) Can the U.S. Monetary Policy Fall (Again) in an Expectation Trap? Staff report 229, Federal Reserve Bank of New York.Google Scholar
Armenter, R. and Bodenstein, M. (2005b) Does the Time Inconsistency Problem Make Flexible Exchange Rates Look Worse Than You Think? Staff report 229, Working paper, Federal Reserve Bank of New York.CrossRefGoogle Scholar
Barro, R. J. and Gordon, D. (1983) A positive theory of monetary policy in a natural rate model. Journal of Political Economy 91 (4), 589–610.Google Scholar
Bernanke, B., Gertler, M., and Watson, M. (1997) Systematic monetary policy and the effects of oil price shocks. Brookings Papers on Economic Activity (Issue 1), 91–157.CrossRefGoogle Scholar
Bils, M. and Klenow, P. (2004) Some evidence on the importance of sticky prices. Journal of Political Economy 112, 947–985.Google Scholar
Chari, V., Christiano, L. J., and Eichenbaum, M. (1998) Expectation traps and discretion. Journal of Economic Theory 81 (2), 462–492.Google Scholar
Christiano, L. J. and Gust, C. (2000) The expectations trap hypothesis. Federal Reserve Bank of Chicago Economic Perspectives 24 (2), 21–39.Google Scholar
Clarida, R., Gali, J., and Gertler, M. (2000) Monetary policy rules and macroeconomic stability: Evidence and some theory. Quarterly Journal of Economics 115 (1), 147–180.Google Scholar
De Long, J. B. (1997) America's peacetime inflation: The 1970s, in Romer, C. and Romer, D. (eds.), Reducing Inflation: Motivation and Strategy. Chicago: Chicago University Press.Google Scholar
Domeij, D. and Floden, M. (2004) The Labor-Supply Elasticity and Borrowing Constraints: Why Estimates Are Biased. Working paper, Stockholm School of Economics.Google Scholar
Dupor, B. (2003) Optimal random monetary policy with nominal rigidity. Journal of Economic Theory 112 (1), 66–78.Google Scholar
Goodfriend, M. (1993) Interest rate policy and the inflation scare problem: 1979–1992. Federal Reserve Bank of Richmond Economic Quarterly 79 (1), 1–23.Google Scholar
Goodfriend, M. and King, R. (2005) The Incredible Volcker Disinflation. Working paper 11562, NBER.CrossRefGoogle Scholar
Judd, J. P. and Rudebusch, G. D. (1998) Taylor's rule and the Fed: 1970–1997. Federal Reserve Bank of San Francisco Economic Quarterly 1998, issue 3, 3–16.Google Scholar
Khan, A., King, R. G., and Wolman, A. L. (2001) The Pitfalls of Monetary Discretion. Working paper 01-08, Federal Reserve Bank of Richmond.Google Scholar
King, R. G. and Wolman, A. L. (2004) Monetary discretion, pricing complementarity and dynamic multiple equilibria. Quarterly Journal of Economics 119 (4), 1513–1553.Google Scholar
Kydland, F. and Prescott, E. C. (1977) Rules rather than discretion: The inconsistency of optimal plans, Journal of Political Economy 85 (3), 473–491.CrossRefGoogle Scholar
Lockwood, B. and Philippopoulos, A. (1994) Inside power, unemployment dynamics and multiple inflation equilibria. Economica 61, 59–77.CrossRefGoogle Scholar
Marcet, A. and Nicolini, J. P. (2003) Recurrent hyperinflations and learning, American Economic Review 93 (5), 1476–1498.Google Scholar
Marcet, A. and Sargent, T. J. (1989) Least-squares learning and the dynamics of hyperinflation, in Barnett, W., Geweke, J., and Shell, K. (eds.), International Symposia in Economic Theory and Econometrics, pp. 119–137. Cambridge, UK: Cambridge University Press.Google Scholar
Morris, S. and Shin, H. S. (1998) Unique equilibrium in a model of self-fulfilling currency attacks. American Economic Review 88 (3), 587–597.Google Scholar
Morris, S. and Shin, H. S. (2004) Coordination risk and the price of debt. European Economic Review 48 (1), 133–153.Google Scholar
Rochet, J.-C. and Vives, X. (2004) Coordination failures and the lender of last resort: Was Bagehot right after all?. Journal of the European Economic Association 2 (6), 1116–1147.CrossRefGoogle Scholar
Siu, H. E. (2004) Time Consistent Monetary Policy with Endogenous Price Rigidity. Working paper, University of British Columbia.Google Scholar
Woodford, M. (2003) Interest and Prices. Princeton, NJ: Princeton University Press.Google Scholar