Monetary Policy, Expectations and Commitment

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Title: Monetary Policy, Expectations and Commitment
Author: Evans, George W., 1949-; Honkapohja, Seppo, 1951-
Abstract: This is a revised and shortened version of Working Paper 2002-11. 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 approximate commitment policy. We assess these 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 particularly well on both counts.
Description: 22 p. 2002-05-27, Revised 2005-04-06
Date: 2005-04-06

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