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Interest Rate Control and Nonconvergence to Rational Expectations

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Howitt, Peter

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Abstract

Under general conditions, a monetary policy of pegging the nominal rate of interest will make it possible for any adaptive learning mechanism that satisfies a weak and plausible condition to converge to rational expectations. Instead, under such a policy an economy will undergo a cumulative process of the sort described.by Milton Friedman. This is shown in a micro-based finance constraint model as well as an IS-LM model. The same result applies also to more flexible policies of interest control and suggests a severe limitation to rational expectations analyses that ignore the issue of expectational stability. Copyright 1992 by University of Chicago Press.

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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 100 (1992)
Issue (Month): 4 (August)
Pages: 776-800
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Handle: RePEc:ucp:jpolec:v:100:y:1992:i:4:p:776-800

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  1. Giuseppe Ferrero, 2004. "Monetary policy and the transition to rational expectations," Computing in Economics and Finance 2004 19, Society for Computational Economics. [Downloadable!]
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  2. Mauro Boianovsky & Hans-Michael Trautwein, 2006. "Wicksell after Woodford," Journal of the History of Economic Thought, Taylor and Francis Journals, vol. 28(2), pages 171-185, June. [Downloadable!] (restricted)
  3. Kaushik Mitra & James Bullard, . "Learning About Monetary Policy Rules," Discussion Papers 00/41, Department of Economics, University of York. [Downloadable!]
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  4. Michael D. Bordo & Joseph G. Haubrich, 2004. "The yield curve, recessions, and the credibility of the monetary regime: long-run evidence, 1875-1997," Working Paper 0402, Federal Reserve Bank of Cleveland. [Downloadable!]
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  5. Charles T. Carlstrom & Timothy S. Fuerst, 1995. "Interest rate rules vs. money growth rules: a welfare comparison in a cash-in-advance economy," Working Paper 9504, Federal Reserve Bank of Cleveland. [Downloadable!]
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  6. Bennett T. McCallum, 2001. "Monetary policy analysis in models without money," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 145-164. [Downloadable!]
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  7. Stefano Eusepi, 2004. "Does Central Bank Transparency Matter for Economic Stability," Computing in Economics and Finance 2004 176, Society for Computational Economics. [Downloadable!]
  8. Stefano Eusepi & Bruce Preston, 2008. "Stabilizing expectations under monetary and fiscal policy coordination," Staff Reports 343, Federal Reserve Bank of New York. [Downloadable!]
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  9. Kaushik Mitra, . "Desirability of Nominal GDP Targeting Under Adaptive Learning," Discussion Papers 00/60, Department of Economics, University of York. [Downloadable!]
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  10. George W. Evans & Seppo Honkapohja, 2002. "Monetary policy; expectations and commitment," Working Paper Series 124, European Central Bank. [Downloadable!]
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  11. Chernov, Mikhail & Mueller, Philippe, 2008. "The Term Structure of Inflation Expectations," CEPR Discussion Papers 6809, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  12. James Bullard & John Duffy, 1993. "Learning in a large square economy," Working Papers 1994-013, Federal Reserve Bank of St. Louis. [Downloadable!]
  13. Stefano Eusepi, 2005. "Central bank transparency under model uncertainty," Staff Reports 199, Federal Reserve Bank of New York. [Downloadable!]
  14. George W. Evans & Seppo Honkapohja, 2004. "Adaptive learning and monetary policy design," Macroeconomics 0405008, EconWPA. [Downloadable!]
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  15. Yu-chin Chen & Pisut Kulthanavit, 2007. "Adaptive Learning and Monetary Policy: Lessons from Japan," Working Papers UWEC-2008-12, University of Washington, Department of Economics. [Downloadable!]
  16. Evans , George W. & Honkapohja, Seppo, 2002. "Policy interaction, learning and the fiscal theory of prices," Research Discussion Papers 18/2002, Bank of Finland. [Downloadable!]
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  17. Ichiro Muto, 2008. "Monetary Policy and Learning from the Central Bank's Forecast," IMES Discussion Paper Series 08-E-01, Institute for Monetary and Economic Studies, Bank of Japan. [Downloadable!]
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