Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Chicago
Working Paper Series
Monetary policy with state contingent interest rates
Bernardino Adão
Isabel Correia
Pedro Teles

What instruments of monetary policy must be used in order to implement a unique equilibrium? This paper revisits the issues addressed by Sargent and Wallace (1975) on the multiplicity of equilibria when policy is conducted with interest rate rules. We show that the appropriate interest rate instruments under uncertainty are state- contingent interest rates, i.e. the nominal returns on state-contingent nominal assets. A policy that pegs state-contingent nominal interest rates, and sets the initial money supply, implements a unique equilibrium. These results hold whether prices are flexible or set in advance.

Download Full text
Cite this item
Bernardino Adão & Isabel Correia & Pedro Teles, Monetary policy with state contingent interest rates, Federal Reserve Bank of Chicago, Working Paper Series WP-04-26, 2004.
More from this series
JEL Classification:
Subject headings:
Keywords: Monetary policy ; Interest rates
For corrections, contact Bernie Flores ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal