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Optimal Constrained Interest-rate Rules

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  • George W. Evans

    ()
    (University of Oregon Economics Department)

  • Bruce McGough

    ()
    (Oregon State University Economics Department)

Abstract

We show that if policy-makers compute the optimal unconstrained interest-rate rule within a Taylor-type class, they may be led to rules that generate indeterminacy and/or instability under learning. This problem is compounded by uncertainty about structural parameters since an optimal rule that is determinate and stable under learning for one calibration may be indeterminate or unstable under learning under a different calibration. We advocate a procedure in which policymakers restrict attention to rules constrained to lie in the determinate learnable region for all plausible calibrations, and that minimize the expected loss, computed using structural parameter priors, subject to this constraint.

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Bibliographic Info

Paper provided by University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2005-9.

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Length: 35
Date of creation: 19 May 2005
Date of revision: 31 May 2006
Handle: RePEc:ore:uoecwp:2005-9

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Related research

Keywords: Monetary policy; Taylor rules; indeterminacy; learning; Estability; parameter uncertainty; robust rules;

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Cited by:
  1. George W. Evans & Seppo Honkapohja, 2008. "Expectations, Learning, And Monetary Policy: An Overview Of Recent Research," Working Papers Central Bank of Chile 501, Central Bank of Chile.
  2. Georgy chabakauri & Suleyman Basak, 2009. "Dynamic Hedging in Incomplete Markets: A Simple Solution," 2009 Meeting Papers 594, Society for Economic Dynamics.
  3. 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.).
  4. Takushi Kurozumi & Willem Van Zandweghe, 2010. "Learning about monetary policy rules when labor market search and matching frictions matter," Research Working Paper RWP 10-14, Federal Reserve Bank of Kansas City.
  5. George Waters, 2011. "Dangers of commitment under rational expectations," Journal of Economics and Finance, Springer, vol. 35(4), pages 371-381, October.

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