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Our most academic publication offers research and surveys on monetary policy, national and international developments, banking, and more. The content is written for an economically informed readership—from the undergraduate student to the PhD.

Vol. 89, No. 4 (Posted 2007-07-01)

Monetary Policy as Equilibrium Selection

by Gaetano Antinolfi, Costas Azariadis, and James Bullard

Can monetary policy guide expectations toward desirable outcomes when equilibrium and welfare are sensitive to alternative, commonly held rational beliefs? This paper studies this question in an exchange economy with endogenous debt limits in which dynamic complementarities between dated debt limits support two Pareto-ranked steady states: a suboptimal, locally stable autarkic state and a constrained optimal, locally unstable trading state. The authors identify feedback policies that reverse the stability properties of the two steady states and ensure rapid convergence to the constrained optimal state.

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