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CAN THE U.S. MONETARY POLICY FALL (AGAIN) IN AN EXPECTATION TRAP?

Published online by Cambridge University Press:  01 November 2008

Roc Armenter  and
Martin Bodenstein
Roc Armenter*
Affiliation:
Federal Reserve Bank of New York
Martin Bodenstein
Affiliation:
Board of Governors of the Federal Reserve System
*
Address correspondence to: Roc Armenter, International Research Function, Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045, USA; e-mail: roc.armenter@ny.frb.org.
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Abstract

We propose a model to study monetary policy under discretion. We focus on Markov perfect equilibria, ruling out trigger strategies. The model is simple enough that the determinants of monetary policy under discretion are clear. We also find that for all parameterizations 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. experience.

Keywords

Time inconsistencyInflationExpectation traps
Type
Articles
Information
Macroeconomic Dynamics , Volume 12 , Issue 5 , November 2008 , pp. 664 - 693
Copyright
Copyright © Cambridge University Press 2008

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