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Monetary policy; expectations and commitment

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Author Info
George W. Evans () (University of Oregon - Department of Economics, 1285 University of Oregon, Eugene , OR 97403, United States.)
Seppo Honkapohja () (University of Cambridge - Faculty of Economics and Politics, Austin Robinson Building, Sidgwick Avenue, Cambridge CB3 9DD, United Kingdom.)

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Abstract

Full commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies. Different types of reactions functions to implement and instrument rules to approximate full commitment have been proposed in the literature. We assess optimal reaction functions and instrument rules, in terms of whether they lead to an RE equilibrium that is both locally determinate and stable under adaptive learning by private agents. The reaction function that appropriately depends explicitly on private expectations performs best on both counts. JEL Classification: E52; E31; D84.

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Publisher Info
Paper provided by European Central Bank in its series Working Paper Series with number 124.

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Length: 49 pages
Date of creation: Feb 2002
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Handle: RePEc:ecb:ecbwps:20020124

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Related research
Keywords: Commitment; interest rate setting; adaptive learning; stability; determinacy.;

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References listed on IDEAS
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  2. Carsten Detken & Vincent Brousseau, 2001. "Monetary policy and fears of financial instability," Working Paper Series 089, European Central Bank. [Downloadable!]
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  4. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December. [Downloadable!] (restricted)
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  5. Günter Coenen, 2000. "Asymptotic confidence bands for the estimated autocovariance and autocorrelation functions of vector autoregressive models," Working Paper Series 09, European Central Bank. [Downloadable!]
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  6. Michael Woodford, 1999. "Commentary : how should monetary policy be conducted in an era of price stability?," Proceedings, Federal Reserve Bank of Kansas City, pages 277-316. [Downloadable!]
  7. Seppo Honkapohja & Kaushik Mitra, 2002. "Learning stability in economics with heterogenous agents," Working Paper Series 120, European Central Bank. [Downloadable!]
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  8. Carlstrom, Charles T. & Fuerst, Timothy S., 2004. "Learning and the central bank," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 327-338, March. [Downloadable!] (restricted)
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  9. Orphanides, Athanasios & Wieland, Volker, 2000. "Inflation zone targeting," European Economic Review, Elsevier, vol. 44(7), pages 1351-1387, June. [Downloadable!] (restricted)
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  10. Evans, George W & Honkapohja, Seppo, 2002. "Monetary Policy, Expectations and Commitment," CEPR Discussion Papers 3434, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  17. JeanPierre Vidal & Philippe Michel & Stephane Lambrecht, 2001. "Public pensions and growth," Working Paper Series 090, European Central Bank. [Downloadable!]
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  22. George W. Evans & Seppo Honkapohja, 2003. "Expectations and the Stability Problem for Optimal Monetary Policies," Review of Economic Studies, Blackwell Publishing, vol. 70(4), pages 807-824, October. [Downloadable!] (restricted)
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  23. Detken, Carsten & Hartmann, Philipp, 2000. "The Euro and International Capital Markets," CEPR Discussion Papers 2461, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  29. Jan Marc Berk & Peter A.G. Vanbergeijk, 2000. "Is the yield curve a useful information variable for the Eurosystem?," Working Paper Series 11, European Central Bank. [Downloadable!]
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  32. Michael Ehrmann, 2000. "Firm size and monetary policy transmission: evidence from German business survey data," Working Paper Series 21, European Central Bank. [Downloadable!]
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  33. McCallum, Bennett T., 1999. "Issues in the design of monetary policy rules," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 23, pages 1483-1530 Elsevier. [Downloadable!] (restricted)
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  34. Günter Coenen & Juan-Luis Vega, 1999. "The demand for M3 in the euro area," Working Paper Series 6, European Central Bank. [Downloadable!]
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