Sophisticated monetary policies

The Ramsey approach to policy analysis finds the best competitive equilibrium given available instruments but is silent about how to get there uniquely. Many ways of specifying monetary policy lead to indeterminacy. Sophisticated policies do not. They depend on the history of past actions and exogenous events, differ on and off the equilibrium path, and can uniquely produce any desired competitive equilibrium. This result holds in two standard monetary economies and is robust to trembles and imperfect monitoring. The result implies that adherence to the Taylor principle is unnecessary. We also show that such adherence is inefficient.