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Expectations and the Stability Problem for Optimal Monetary Policies

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Author Info
Evans, George W
Honkapohja, Seppo

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Abstract

A fundamentals-based monetary policy rule, which would be the optimal monetary policy without commitment when private agents have perfectly rational expectations, is unstable if in fact these agents follow standard adaptive learning rules. This problem can be overcome if private expectations are observed and suitably incorporated into the policy maker's optimal rule. These strong results extend to the case in which there is simultaneous learning by the policy maker and the private agents. Our findings show the importance of conditioning policy appropriately, not just on fundamentals, but also directly on observed household and firm expectations.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2805.

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Date of creation: Apr 2001
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Handle: RePEc:cpr:ceprdp:2805

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Related research
Keywords: Adaptive Learning; Instability; Private Expectations; Stability;

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Find related papers by JEL classification:
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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This page was last updated on 2009-10-29.

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