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Expectations and the Stability Problem for Optimal Monetary Policies

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Author Info

  • Honkapohja, S.
  • Evans, G.W.

Abstract

A fundamentals based monetary policy rule, which would be optimal 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, not just on fundamentals, but also directly on observed household and firm expectations.

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Bibliographic Info

Paper provided by Department of Economics in its series University of Helsinki, Department of Economics with number 481.

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Length: 31 pages
Date of creation: 2000
Date of revision:
Handle: RePEc:fth:helsec:481

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Postal: University of Helsinki; Department of Economics, P.O.Box 54 (Unioninkatu 37) FIN-00014 Helsingin Yliopisto
Phone: +358 9 191 8897
Fax: +358 9 191 8877
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Web page: http://www.helsinki.fi/politiikkajatalous/
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Keywords: MONETARY POLICY ; POLICY MAKING ; HOUSEHOLD;

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