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Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
Can the U.S. monetary policy fall (again) in an expectation trap?
Roc Armenter
Martin Bodenstein
Abstract

We provide a tractable model to study monetary policy under discretion. We focus on Markov equilibria. For all parametrizations 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. We carefully characterize the set of Markov equilibria along the parameter space and find our results to be robust.


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Roc Armenter & Martin Bodenstein, Can the U.S. monetary policy fall (again) in an expectation trap?, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 860, 2006.
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Keywords: Inflation (Finance) ; Econometric models ; Equilibrium (Economics) ; Monetary policy
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