Economic models with multiple equilibria, such as Diamond and Dybvig (1983), have become increasingly useful in analyzing volatility in financial markets and in business cycles. In many of these models, indeterminacy is a result of incomplete financial markets or technological nonconvexities. Here we identify economic policy discretion to be another distinct cause of indeterminate equilibrium and examine how discretion affects the number of equilibria, as well as their volatility.
Discretion, Rules and Volatility
GALASSO, VINCENZO
1996
Abstract
Economic models with multiple equilibria, such as Diamond and Dybvig (1983), have become increasingly useful in analyzing volatility in financial markets and in business cycles. In many of these models, indeterminacy is a result of incomplete financial markets or technological nonconvexities. Here we identify economic policy discretion to be another distinct cause of indeterminate equilibrium and examine how discretion affects the number of equilibria, as well as their volatility.
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