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Monetary Policy, Expectations and Commitment

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  • George W. Evans
  • Seppo Honkapohja

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 approximate commitment policy. We assess these rules in terms of whether they lead to a rational expectations equilibrium that is both locally determinate and stable under adaptive learning by private agents. A reaction function that appropriately depends explicitly on private sector expectations performs particularly well on both counts. Copyright The editors of the "Scandinavian Journal of Economics", 2006 .

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Article provided by Wiley Blackwell in its journal The Scandinavian Journal of Economics.

Volume (Year): 108 (2006)
Issue (Month): 1 (03)
Pages: 15-38

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Handle: RePEc:bla:scandj:v:108:y:2006:i:1:p:15-38

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Web page: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1467-9442

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  1. Honkapohja, Seppo & Mitra, Kaushik, 2004. "Are non-fundamental equilibria learnable in models of monetary policy?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(8), pages 1743-1770, November.
  2. George W. Evans & Seppo Honkapohja, 2003. "Expectations and the Stability Problem for Optimal Monetary Policies," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 70(4), pages 807-824, October.
  3. Michael Woodford, 1999. "Commentary : how should monetary policy be conducted in an era of price stability?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 277-316.
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