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This paper examines welfare effects of monetary policy im- plementation in a sticky price model. The central bank's plan under discretionary optimization is forward-looking and exhibits multiple solutions if transactions frictions are not negligibly small. The central bank can implement au- toregressive solutions to the plan by inertial interest rate adjustments or by money transfers. These solutions can be associated with lower welfare losses than a minimum state variable solution to the plan implemented by non-inertial interest rate adjustments. The welfare gain from a his- tory dependent policy implementation tends to rise with the strength of transactions frictions and the degree of price flexibility. It is further shown that the central bank's plan can uniquely be implemented in a history dependent way by money transfers, but not by (inertial) interest rate adjust- ments. Yet, the latter remains the first choice if transactions frictions are negligible.

Discretionary Policy, Multiple Equilibria, and Monetary Instruments