Olivier Loisel (ENSAE and CREST)
This paper is about policy-instrument rules ensuring local equilibrium determinacy in dynamic rational-expectations models. I point out that most of the rules considered in the literature implicitly require the policymaker to play after the private sector within each period, because they require the policy instrument to react out of equilibrium to the private sector’s contemporaneous actions or expectations. I draw some implications of this timing for the resolution of models with policy shocks and, consequently, for the estimation of models or policy-instrument rules with policy shocks. I then consider the alternative and arguably more relevant timing in which the policymaker is the …rst mover. I show that, although the latter timing puts the policymaker behind the curve, it does not reduc her ability to control the economy. Indeed, I design, in a general model, for any relevant local path of the endogenous variables, a policy-instrument rule for …rst movers that implements this path as the unique local equilibrium - even in the presence of implementation and observation lags, which put the policymaker further behind the curve.