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On the Determinacy of Monetary Policy under Expectational Errors

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Author Info
Jagjit S. Chadha ()
Luisa Corrado ()

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Abstract

Forward looking agents with expectational errors provide a problem for monetary policy. We show that under such conditions a standard interest rate rule may not achieve determinacy. We suggest a modification to the standard policy rule that guarantees determinacy in this setting, which involves the policy maker co-ordinating inflation dynamics by responding to each of past, current and expected inflation. We show that this solution maps directly into Woodford’s (2000) timeless perspective. We trace the responses in an artificial economy and illustrate the extent to which macroeconomic persistence is reduced following the adoption of this rule.

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Publisher Info
Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 0603.

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Date of creation: Jan 2006
Date of revision: Apr 2007
Handle: RePEc:san:cdmawp:0603

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Related research
Keywords: Expectational Errors Indeterminacy Monetary Policy Rules.

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Find related papers by JEL classification:
C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques
C62 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Existence and Stability Conditions of Equilibrium
E00 - Macroeconomics and Monetary Economics - - General - - - General

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