Journal Article

Monetary policy as equilibrium selection

Abstract: Can monetary policy guide expectations toward desirable outcomes when equilibrium and welfare are sensitive to alternative, commonly held rational beliefs? This paper studies this question in an exchange economy with endogenous debt limits in which dynamic complementarities between dated debt limits support two Pareto-ranked steady states: a suboptimal, locally stable autarkic state and a constrained optimal, locally unstable trading state. The authors identify feedback policies that reverse the stability properties of the two steady states and ensure rapid convergence to the constrained optimal state.

Keywords: Monetary policy; Equilibrium (Economics);

Status: Published in Proceedings of the Thirty-First Annual Economic Policy Conference of the Federal Reserve Bank of St. Louis : Frontiers in Monetary Policy Research

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Review

Publication Date: 2007

Volume: 89

Issue: Jul

Pages: 331-342