Monetary discretion, pricing complementarity, and dynamic multiple equilibria
By: Robert G. King and Alexander L. Wolman.
Contributors: Wolman, Alexander L.; Federal Reserve Bank of Richmond.
Series: Working paper ;; no. 04-5; Working paper (Federal Reserve Bank of Richmond : Online) ;; no. 04-5.
Publisher: Federal Reserve Bank of Richmond
Published: 2004
Place of publication: [Richmond, Va.]
Language: eng
Format: Electronic resource
Subjects: Monetary policy.; Price regulation.; Inflation (Finance)
Description: "A discretionary policymaker responds to the state of the economy each period.  Private agents' current behavior determines the future state based on expectations of future policy.  Discretionary policy thus can lead to dynamic complementarity between private agents and a policymaker, which in turn can generate multiple equilibria.  Working in a simple new Keynesian model with two-period staggered pricing--in which equilibrium is unique under commitment--we illustrate this interaction: if firms expect a high future money supply, (i) they will set a high current price and (ii) the future monetary authority will accommodate with a higher money supply, so as not to distort relative prices.  We show that there are two point-in-time equilibria under discretion and we construct a related stochastic sunspot equilibrium"--Federal Reserve Bank of Richmond web site.
Notes: Includes bibliographical references.
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