Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/60700
Authors: 
Armenter, Roc
Bodenstein, Martin
Year of Publication: 
2005
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 229
Abstract: 
We provide a tractable model to study monetary policy under discretion. We restrict our analysis to Markov equilibria. We find that for all parametrizations with an equilibrium inflation rate of about 2 percent, there is a second equilibrium with an inflation rate just above 10 percent. Thus, the model can simultaneously account for the low and high inflation episodes in the United States. We carefully characterize the set of Markov equilibria along the parameter space and find our results to be robust, suggesting that expectation traps are more than just a theoretical curiosity.
Subjects: 
expectation traps
monetary policy discretion
inflation
JEL: 
E31
E52
E58
Document Type: 
Working Paper

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