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Monetary Policy, Indeterminacy and Learning

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Author Info
George W. Evans () (University of Oregon Economics Department)
Bruce McGough (Oregon State University)

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Abstract

Forward-looking monetary models with Taylor-type interest rate rules are known to generate indeterminacies, with a potential dependence on extraneous "sunspots," for some structural and policy parameters. We investigate the stability of these solutions under adaptive learning, focusing on "common factor" or "resonant frequency" representations in which the observed sunspot has a suitable time-series structure. We consider specifications incorporating both lagged and expected inflation in the Phillips Curve, and both expected and inertial elements in the policy rule. We find that some policy rules can indeed lead to learnable sunspot solutions and we investigate the conditions under which this phenomenon arises.

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Publisher Info
Paper provided by University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2003-34.

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Length: 48
Date of creation: 11 Oct 2003
Date of revision: 01 Apr 2004
Handle: RePEc:ore:uoecwp:2003-34

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Related research
Keywords: Monetary Policy; sunspots; expectations; learning; stability;

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Evans, George W. & Honkapohja, Seppo, 2003. "Existence of adaptively stable sunspot equilibria near an indeterminate steady state," Journal of Economic Theory, Elsevier, vol. 111(1), pages 125-134, July. [Downloadable!] (restricted)
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  2. 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)
    Other versions:
  3. Bernanke, Ben S & Woodford, Michael, 1997. "Inflation Forecasts and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 653-84, November.
    Other versions:
  4. George W. Evans & Seppo Honkapohja, 2003. "Adaptive learning and monetary policy design," Proceedings, Federal Reserve Bank of Cleveland, pages 1045-1084.
    Other versions:
  5. 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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  6. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
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  7. G. Desgranges & G. Negroni, 2001. "Expectations Coordination on a Sunspot Equilibrium: an Eductive Approach," THEMA Working Papers 2001-13, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise. [Downloadable!]
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  8. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. James Bullard & Kaushik Mitra, 2003. "Determinacy, learnability, and monetary policy inertia," Working Papers 2000-030, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Guse, E., 2005. "Learning in a Misspecified Multivariate Self-referential Linear Stochastic Model," Cambridge Working Papers in Economics 0548, Faculty of Economics, University of Cambridge. [Downloadable!]
    Other versions:
  2. 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. [Downloadable!] (restricted)
    Other versions:
  3. Brzoza-Brzezina, Michal & Kot, Adam, 2008. "The Relativity Theory Revisited: Is Publishing Interest Rate Forecasts Really so Valuable?," MPRA Paper 10296, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  4. Fanelli, Luca, 2008. "Evaluating the New Keynesian Phillips Curve under VAR-Based Learning," Economics Discussion Papers 2008-15, Kiel Institute for the World Economy. [Downloadable!]
    Other versions:
  5. Takushi Kurozumi & Willem Van Zandweghe, 2008. "Labor market search and interest rate policy," Research Working Paper RWP 08-03, Federal Reserve Bank of Kansas City. [Downloadable!]
  6. Jagjit Chadha & Luisa Corrado, 2006. "Sunspots and Monetary Policy," Economics and Finance Discussion Papers 06-06, Economics and Finance Section, School of Social Sciences, Brunel University. [Downloadable!]
  7. Orlando Gomes & Vivaldo M. Mendes & Diana A. Mendes, 2007. "The Dynamics of Learning in Optimal Monetary Policy," Working Papers ercwp2008, ISCTE, UNIDE, Economics Research Centre. [Downloadable!]
  8. George W. Evans & Bruce McGough, 2004. "Monetary Policy and Stable Indeterminacy with Inertia," University of Oregon Economics Department Working Papers 2004-4, University of Oregon Economics Department, revised 29 Mar 2004. [Downloadable!]
    Other versions:
  9. Robert J. Tetlow & Peter von zur Muehlen, 2005. "Robustifying learnability," Finance and Economics Discussion Series 2005-58, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  10. Tomasz Michalak & Jacob Engwerda & Joseph Plasmans, 2009. "Strategic Interactions between Fiscal and Monetary Authorities in a Multi-Country New-Keynesian Model of a Monetary Union," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  11. Loisel, O., 2006. "Bubble-free interest-rate rules," Documents de Travail 161, Banque de France. [Downloadable!]
  12. George W. Evans & Bruce McGough, 2005. "Optimal Constrained Interest-rate Rules," University of Oregon Economics Department Working Papers 2005-9, University of Oregon Economics Department, revised 31 May 2006. [Downloadable!]
    Other versions:
  13. Anatoliy Belaygorod & Michael J. Dueker, 2007. "The price puzzle and indeterminacy in an estimated DSGE model," Working Papers 2006-025, Federal Reserve Bank of St. Louis. [Downloadable!]
  14. Bruce McGough & Glenn D. Rudebusch & John C. Williams, 2004. "Using a long-term interest rate as the monetary policy instrument," Working Papers in Applied Economic Theory 2004-22, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  15. Jagjit S. Chadha & Luisa Corrado, 2006. " On the Determinacy of Monetary Policy under Expectational Errors," CDMA Working Paper Series 0603, Centre for Dynamic Macroeconomic Analysis, revised Apr 2007. [Downloadable!]
    Other versions:
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