Expectations and the Stability Problem for Optimal Monetary Policies
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Date
2001-08-03
Authors
Evans, George W., 1949-
Honkapohja, Seppo, 1951-
Journal Title
Journal ISSN
Volume Title
Publisher
University of Oregon, Dept. of Economics
Abstract
A fundamentals based monetary policy rule, which would be the optimal monetary policy without commitment when private agents have perfectly rational expectations, is unstable if in fact these agents follow standard adaptive learning rules. This problem can be overcome if private expectations are observed and suitable incorporated into the policy maker's optimal rule. These strong results extend to the case in which there is simultaneous learning by the policy maker and the private agents. Our findings show the importance of conditioning policy appropriately, not just on fundamentals, but also directly on observed household and firm expectations.
Description
Keywords
Macroeconomics, Monetary policy (Targets, instruments, and effects), Mathematical and quantitative methods, Information and uncertainty