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Robustifying learnability

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  • Tetlow, Robert J.
  • von zur Muehlen, Peter

Abstract

In recent years, the learnability of rational expectations equilibria (REE) and determinacy of economic structures have rightfully joined the usual performance criteria among the sought-after goals of policy design. Some contributions to the literature, including Bullard and Mitra (2001) and Evans and Honkapohja (2002), have made significant headway in establishing certain features of monetary policy rules that facilitate learning. However a treatment of policy design for learnability in worlds where agents have potentially misspecified their learning models has yet to surface. This paper provides such a treatment. We begin with the notion that because the profession has yet to settle on a consensus model of the economy, it is unreasonable to expect private agents to have collective rational expectations. We assume that agents have only an approximate understanding of the workings of the economy and that their learning the reduced forms of the economy is subject to potentially destabilizing perturbations. The issue is then whether a central bank can design policy to account for perturbations and still assure the learnability of the model. Our test case is the standard New Keynesian business cycle model. For different parameterizations of a given policy rule, we use structured singular value analysis (from robust control theory) to find the largest ranges of misspecifications that can be tolerated in a learning model without compromising convergence to an REE. In addition, we study the cost, in terms of performance in the steady state of a central bank that acts to robustify learnability on the transition path to REE. (Note: This paper contains full-color graphics) JEL Classification: C6, E5

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Paper provided by European Central Bank in its series Working Paper Series with number 0593.

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Date of creation: Feb 2006
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Handle: RePEc:ecb:ecbwps:20060593

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Keywords: E-stability; learnability; Learning; monetary policy; robust control;

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References

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Citations

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Cited by:
  1. Evans, George W & Honkapohja, Seppo, 2008. "Expectations, Learning and Monetary Policy: An Overview of Recent Rersearch," CEPR Discussion Papers 6640, C.E.P.R. Discussion Papers.
  2. Alexander Ludwig and Alexander Zimper, 2013. "Biased Bayesian Learning with an Application to the Risk-Free Rate Puzzle," Working Papers 390, Economic Research Southern Africa.
  3. Martin Ellison & Thomas J. Sargent, 2009. "A defence of the FOMC," Economics Series Working Papers 457, University of Oxford, Department of Economics.
    • Martin Ellison & Thomas J. Sargent, 2012. "A Defense Of The Fomc," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(4), pages 1047-1065, November.
  4. Heinz-Peter Spahn, 2009. "The New Keynesian Microfoundations of Macroeconomics," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 317/2009, Department of Economics, University of Hohenheim, Germany.
  5. Mostafavi, Moeen & Fatehi, Ali-Reza & Shakouri G., Hamed & Von zur Muehlen, Peter, 2011. "A predictive multi-agent approach to model systems with linear rational expectations," MPRA Paper 35351, University Library of Munich, Germany, revised 11 Dec 2011.
  6. Mostafavi, Moeen & Shakouri G., Hamed & Fatehi, Ali-Reza, 2010. "Why the determinacy condition is a weak criterion in rational expectations models," MPRA Paper 28320, University Library of Munich, Germany.

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