Central banker discovers quantization

Narayana R. Kocherlakota

This paper has two parts. In the first part, I demonstrate that, in the absence of price and wage bounds, monetary models do not have current equilibria - and so lack predictive content - for a wide range of possible policy rules and/or beliefs about future equilibrium outcomes. This non-existence problem disappears in models in which firms face (arbitrarily loose) finite upper bounds on prices or positive lower bonds on nominal wages.

And the reason we find equilibria when we work within bounded uncertainty is because we are all equally precise most of the time. So, we accept the tradebook error because it maintains a quasi-stable equilibria.