Open Mouth Operations
26 Pages Posted: 14 Feb 2018 Last revised: 29 Apr 2020
Date Written: 2018-02-05
We examine the standard New Keynesian economyâ€™s Ramsey problem written in terms of instrument settings instead of allocations. Its standard formulation makes two instruments available: the path of current and future interest rates, and an â€œopen mouth operationâ€� which selects one of the many equilibria consistent with the chosen interest rates. Removing the open mouth operation by imposing a finite commitment horizon yields pathological policy advice that relies on the model's forward guidance puzzle.
Keywords: Keynesian economics, equilibrium multiplicity, monetary policy, open market operations
JEL Classification: E12, E52, E58
Suggested Citation: Suggested Citation