Monetary Policy as a Process of Search

Andrew Caplin, John Leahy

    Research output: Contribution to journalArticle

    Abstract

    Monetary policy makers are uncertain about the state of the economy and learn from the economy's reaction to policy. Private agents, however, anticipate any systematic attempt to incorporate this information into future policy. We analyze this feedback in the context of a monetary authority's attempt to stimulate an economy in recession. We show that modest stimuli may prove ineffectual. If small reductions in interest rates are unlikely to promote a response, then they may be followed by further cuts. A vicious circle develops in which the expectation that the policy could fail leads investors to delay investment thereby promoting failure.

    Original languageEnglish (US)
    Pages (from-to)689-702
    Number of pages14
    JournalAmerican Economic Review
    Volume86
    Issue number4
    StatePublished - Sep 1 1996

    ASJC Scopus subject areas

    • Economics and Econometrics

    Fingerprint Dive into the research topics of 'Monetary Policy as a Process of Search'. Together they form a unique fingerprint.

  • Cite this

    Caplin, A., & Leahy, J. (1996). Monetary Policy as a Process of Search. American Economic Review, 86(4), 689-702.