Monetary policy, expectations and commitment
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Date
2002-05-22
Authors
Evans, George W., 1949-
Honkapohja, Seppo, 1951-
Journal Title
Journal ISSN
Volume Title
Publisher
University of Oregon, Dept. of Economics
Abstract
Commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies. A number of interest rate reaction functions and instrument rules have been proposed to implement or approxmiate commitment policy. We assess these optimal reaction functions and instrument rules in terms of whether they lead to an RE equilibrium that is both locally determinate and stable under adaptive learning by private agents. A reaction function that appropriately depends explicitly on private expectations performs well on both counts.
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Keywords
Determinacy, Stability, Adaptive learning, Interest rate setting, Commitment, Microeconomics, Macroeconomics, Monetary policy (Targets, instruments, and effects)