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Working Paper, No. 2018-14, 2018 Crossref
Discretion Rather than Rules: Equilibrium Uniqueness and Forward Guidance with Inconsistent Optimal Plans (REVISED January 2019)

New Keynesian economies with active interest rate rules gain equilibrium determinacy from the central bank's incredible off-equilibrium-path promises (Cochrane, 2011). We suppose instead that the central bank sets interest rate paths and occasionally has the discretion to change them. With empirically-reasonable frequencies of central bank reoptimization, the monetary policy game has a unique Markov-perfect equilibrium wherein forward guidance influences current outcomes without displaying a forward guidance puzzle.

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