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Is the Friedman Rule Stabilizing? Some Unpleasant Results in a Heterogeneous Expectations Framework

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  • Mattia Guerini

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    (Sant'Anna School of Advanced Studies, Pisa)

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    Abstract

    The recent economic crisis gave proof of the fact that the Taylor rule is no more that good instrument as it was thought to be just ten years ago; this might be due to the fact that agents acting in the economy hold Heterogeneous Expectations (HE). In a recent paper Anufriev et al. (2013) suggest that a way to force stability on the economic system is to adopt a more aggressive Taylor rule. In the present paper a standard NK-DSGE is considered in order to investigate whether a Friedman k-percent monetary policy rule may be a valid instrument to counteract the instability created by the presence of HE in a framework à la Brock and Hommes (1997). The model here presented suggests that when such a money supply rule is adopted by the Central Bank, stability strongly depends on the intensity of choice, which represents the ability of the agents to switch toward the best available predictor.

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    Bibliographic Info

    Paper provided by Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE) in its series DISCE - Working Papers del Dipartimento di Economia e Finanza with number def3.

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    Length: 32
    Date of creation: Nov 2013
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    Handle: RePEc:ctc:serie1:def3

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    Web page: http://dipartimenti.unicatt.it/defin
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    Keywords: Heterogeneous Expectations; Friedman Monetary Policy Rule; Macroeconomic Stability;

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    1. Luca Colombo & Herbert Dawid, 2013. "Strategic Location Choice under Dynamic Oligopolistic Competition and Spillovers," DISCE - Working Papers del Dipartimento di Economia e Finanza def1, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    2. Adriana Cornea & Cars Hommes & Domenico Massaro, 2013. "Behavioral Heterogeneity in U.S. Inflation Dynamics," Tinbergen Institute Discussion Papers 13-015/II, Tinbergen Institute.
    3. Mikhail Anufriev & Tiziana Assenza & Cars Hommes & Domenico Massaro, 0000. "Interest Rate Rules and Macroeconomic Stability under Heterogeneous Expectations," Tinbergen Institute Discussion Papers 09-040/1, Tinbergen Institute.
    4. Massimo Bordignon & Matteo Gamalerio & Gilberto Turati, 2013. "Decentralization, Vertical Fiscal Imbalance, and Political Selection," DISCE - Working Papers del Dipartimento di Economia e Finanza def2, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    5. Tiziana Assenza & Peter Heemeijer & Cars Hommes & Domenica Massaro, 2011. "Individual Expectations and Aggregate Macro Behavior," DNB Working Papers 298, Netherlands Central Bank, Research Department.
    6. Carl E. Walsh, 2010. "Monetary Theory and Policy, Third Edition," MIT Press Books, The MIT Press, edition 3, volume 1, number 0262013770, December.
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    Cited by:
    1. Tiziana Assenza & Jakob Grazzini & Cars Hommes & Domenico Massaro, 2014. "PQ Strategies in Monopolistic Competition: Some Insights from the Lab," DISCE - Working Papers del Dipartimento di Economia e Finanza def11, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    2. Russel Davidson & Andrea Monticini, 2014. "Heteroskedasticity-and-Autocorrelation-Consistent Bootstrapping," DISCE - Working Papers del Dipartimento di Economia e Finanza def12, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).

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