Monetary Policy as Equilibrium Selection
نویسندگان
چکیده
Can monetary policy guide expectations toward desirable outcomes when equilibrium and welfare are sensitive to alternative, commonlyheld rational beliefs? We study 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 sub-optimal, locally stable autarkic state, and a constrained optimal, locally unstable trading state. We identify feedback policies which reverse the stability properties of the two steady states and ensure rapid convergence to the constrained optimal state.
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