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Learning about Monetary Policy Rules when Long-Horizon Expectations Matter

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Author Info
Bruce Preston
Abstract

This paper considers the implications of an important source of model misspecification for the design of monetary policy rules: the assumed manner of expectations formation. In the model considered here, private agents seek to maximize their objectives subject to standard constraints and the restriction of using an econometric model to make inferences about future uncertainty. Because agents solve a multiperiod decision problem, their actions depend on forecasts of macroeconomic conditions many periods into the future, unlike the analysis of Bullard and Mitra (2002) and Evans and Honkapohja (2002). A Taylor rule ensures convergence to the rational expectations equilibrium associated with this policy if the so-called Taylor principle is satisfied. This suggests the Taylor rule to be desirable from the point of view of eliminating instability due to self-fulfilling expectations.

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Publisher Info
Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 1 (2005)
Issue (Month): 2 (September)
Pages:
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Handle: RePEc:ijc:ijcjou:y:2005:q:3:a:3

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Find related papers by JEL classification:
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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  1. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July. [Downloadable!] (restricted)
  2. Bennett T. McCallum, 1983. "On Non-Uniqueness in Rational Expectations Models: An Attempt at Perspective," NBER Working Papers 0684, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Marcet, Albert & Sargent, Thomas J, 1989. "Convergence of Least-Squares Learning in Environments with Hidden State Variables and Private Information," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1306-22, December. [Downloadable!] (restricted)
  4. James Bullard & Kaushik Mitra, . "Determinacy, Learnability, and Monetary Policy Inertia," Discussion Papers 00/43, Department of Economics, University of York. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Aoki, Kosuke & Nikolov, Kalin, 2005. "Rule-Based Monetary Policy Under Central Banking Learning," CEPR Discussion Papers 5056, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Fabio Milani, 2005. "A Bayesian DSGE Model with Infinite-Horizon Learning: Do "Mechanical" Sources of Persistence Become Superfluous?," Working Papers 060703, University of California-Irvine, Department of Economics. [Downloadable!]
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  3. Michael Woodford, 2007. "How Important is Money in the Conduct of Monetary Policy?," Levine's Working Paper Archive 122247000000001419, UCLA Department of Economics. [Downloadable!]
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  4. James Bullard & George W. Evans & Seppo Honkapohja, 2005. "Near-rational exuberance," Working Paper Series 555, European Central Bank. [Downloadable!]
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  5. John C. Williams, 2006. "Monetary policy in a low inflation economy with learning," Working Paper Series 2006-30, Federal Reserve Bank of San Francisco. [Downloadable!]
  6. Evans , George W & Honkapohja, Seppo, 2007. "Expectations, learning and monetary policy: an overview of recent research," Research Discussion Papers 32/2007, Bank of Finland. [Downloadable!]
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