Journal Article

Monetary policy and global equilibria in a production economy

Abstract: In linear macroeconomic models, an active Taylor rule for monetary policy can guarantee a locally unique nonexplosive equilibrium. In a series of articles, Benhabib, Schmitt-Groh, and Uribe looked beyond the local dynamics and showed that active Taylor rules could interact with the zero bound on nominal interest rates to generate multiple equilibria, including a steady-state equilibrium with inflation below target. Recently, the persistence of low inflation and low nominal interest rates has brought attention to Benhabib, Schmitt-Groh, and Uribe's work in policy circles. We provide an introduction to this line of research. The specific model used here?Rotemberg price setting in discrete time?fits neatly into the frameworks typically used for applied monetary policy analysis. Furthermore, we provide computer programs in the open source software R to replicate the results in the paper.

Keywords: Monetary policy; Inflation (Finance);

Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Economic Quarterly

Publication Date: 2010

Volume: 96

Issue: 4Q

Pages: 317-337