Learning about Monetary Policy Rules when Long-Horizon Expectations Matter
AbstractThis 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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Bibliographic InfoArticle provided by International Journal of Central Banking in its journal International Journal of Central Banking.
Volume (Year): 1 (2005)
Issue (Month): 2 (September)
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Other versions of this item:
- Preston, Bruce, 2005. "Learning about Monetary Policy Rules when Long-Horizon Expectations Matter," MPRA Paper 830, University Library of Munich, Germany.
- Bruce Preston, 2003. "Learning about monetary policy rules when long-horizon expectations matter," Working Paper 2003-18, Federal Reserve Bank of Atlanta.
- 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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