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Optimal Monetary Policy Rules: The Problem of Stability Under Heterogeneous Learning

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  • Anna Bogomolova
  • Dmitri Kolyuzhnov
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    Abstract

    In this paper we extend the analysis of optimal monetary policy rules in terms of stability of an economy, started by Evans and Honkapohja (2003b), to the case of heterogeneous private agents learning. Following Giannitsarou (2003), we pose the question about the applicability of the representative agent hypothesis to learning. This hypothesis was widely used in learning literature at early stages to demonstrate convergence of an economic system under adaptive learning of agents to one of the rational expectations equilibria in the economy. We test these monetary policy rules in the general setup of the New Keynesian model that is a work horse of monetary policy models today. It is of interest to see that the results obtained by Evans and Honkapohja (2003b) for the homogeneous learning case are replicated for the case when the representative agent hypothesis is lifted.

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    Bibliographic Info

    Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp379.

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    Date of creation: Dec 2008
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    Handle: RePEc:cer:papers:wp379

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    Related research

    Keywords: Monetary policy rules; new Keynesian model; adaptive learning; stability of equilibrium; heterogeneous agents.;

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    References

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    1. Johnson, Charles R., 1974. "Sufficient conditions for D-stability," Journal of Economic Theory, Elsevier, vol. 9(1), pages 53-62, September.
    2. James Bullard & Kaushik Mitra, 2002. "Learning about monetary policy rules," Working Papers 2000-001, Federal Reserve Bank of St. Louis.
    3. Kaushik Mitra & Seppo Honkapohja, 2004. "Learning Stability in Economies with Heterogenous Agents," Royal Holloway, University of London: Discussion Papers in Economics 04/17, Department of Economics, Royal Holloway University of London, revised Jul 2004.
    4. Richard Clarida & Jordi Gali & Mark Gertler, 2002. "A Simple Framework for International Monetary Policy Analysis," NBER Working Papers 8870, National Bureau of Economic Research, Inc.
    5. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
    6. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, December.
    7. Chryssi Giannitsarou, 2003. "Heterogeneous Learning," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 885-906, October.
    8. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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