We study a Markov-perfect monetary policy in an open New Keynesian economy with incomplete financial markets. We analyze inflation and exchange rate targeting regimes and demonstrate that both cases may result in multiple equilibria. These equilibria feature qualitatively and quantitatively...

Discretionary policymakers cannot manage private-sector expectations and cannot coordinate the actions of future policymakers. As a consequence, expectations traps and coordination failures can occur and multiple equilibria can arise. In order to utilize the explanatory power of models with...

Discretionary policymakers cannot manage private-sector expectations and cannot coordinate the actions of future policymakers. As a consequence, expectations traps and coordination failures can occur and multiple equilibria can arise. To utilize the explanatory power of models with multiple...