Expectations and the Stability Problem for Optimal Monetary Policies

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Expectations and the Stability Problem for Optimal Monetary Policies

Author Info

Honkapohja, S.
Evans, G.W.

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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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Publisher 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
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Other versions of this item:

Article
- 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)
Paper
- Honkapohja, Seppo & Evans, George W., 2000. "Expectations and the stability problem for optimal monetary policies," Discussion Paper Series 1: Economic Studies 2000,10, Deutsche Bundesbank, Research Centre. [Downloadable!]
- Evans, George W & Honkapohja, Seppo, 2001. "Expectations and the Stability Problem for Optimal Monetary Policies," CEPR Discussion Papers 2805, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
- George W. Evans & Seppo Honkapohja, 2001. "Expectations and the Stability Problem for Optimal Monetary Policies," University of Oregon Economics Department Working Papers 2001-6, University of Oregon Economics Department, revised 03 Aug 2001. [Downloadable!]

Find related papers by JEL classification:
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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