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Robust Learning Stability with Operational Monetary Policy Rules

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  • George W. Evans

    ()

  • Seppo Honkapohja

    ()

Abstract

We consider “robust stability†of a rational expectations equilibrium, which we define as stability under discounted (constant gain) least-squares learning, for a range of gain parameters. We find that for operational forms of policy rules, i.e. rules that do not depend on contemporaneous values of endogenous aggregate variables, many interest-rate rules do not exhibit robust stability. We consider a variety of interest-rate rules, including instrument rules, optimal reaction functions under discretion or commitment, and rules that approximate optimal policy under commitment. For some reaction functions we allow for an interest-rate stabilization motive in the policy objective. The expectations-based rules proposed in Evans and Honkapohja (2003, 2006) deliver robust learning stability. In contrast, many proposed alternatives become unstable under learning even at small values of the gain parameter.

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Bibliographic Info

Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 200719.

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Date of creation: 15 Oct 2007
Date of revision: 15 Jan 2008
Handle: RePEc:san:cdmawp:0719

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Keywords: Commitment; interest-rate setting; adaptive learning; stability; determinacy.;

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References

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  1. John Duffy & Wei Xiao, 2006. "The Value of Interest Rate Stabilization Policies When Agents are Learning," Working Papers 284, University of Pittsburgh, Department of Economics, revised Oct 2006.
  2. Fabio Milani, 2005. "Expectations, Learning and Macroeconomic Persistence," Working Papers 050608, University of California-Irvine, Department of Economics.
  3. Evans George W. & Guesnerie Roger, 1993. "Rationalizability, Strong Rationality, and Expectational Stability," Games and Economic Behavior, Elsevier, vol. 5(4), pages 632-646, October.
  4. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
  5. Evans, George W. & Honkapohja, Seppo, 2002. "Monetary policy, expectations and commitment," Working Paper Series 0124, European Central Bank.
  6. 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.
  7. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
  8. George W. Evans & Seppo Honkapohja, 2004. "Adaptive learning and monetary policy design," Macroeconomics 0405008, EconWPA.
  9. 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.
  10. Bennett T. McCallum, 1997. "Issues in the Design of Monetary Policy Rules," NBER Working Papers 6016, National Bureau of Economic Research, Inc.
  11. Bennett T. McCallum & Edward Nelson, 2000. "Timeless Perspectives vs. Discretionary Monetary Policy In Forward-Looking Models," NBER Working Papers 7915, National Bureau of Economic Research, Inc.
  12. Woodford, Michael, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(0), pages 1-35, Supplemen.
  13. Fabio Milani, 2005. "Adaptive Learning and Inflation Persistence," Macroeconomics 0506013, EconWPA.
  14. James B. Bullard, 2006. "The learnability criterion and monetary policy," Review, Federal Reserve Bank of St. Louis, issue May, pages 203-217.
  15. Wiliam Branch & George W. Evans, 2005. "A Simple Recursive Forecasting Model," University of Oregon Economics Department Working Papers 2005-3, University of Oregon Economics Department, revised 01 Feb 2005.
  16. Evans, G.W. & Honkapohja ,S. & Williams, N., 2005. "Generalized Stochastic Gradient Learning," Cambridge Working Papers in Economics 0545, Faculty of Economics, University of Cambridge.
  17. Evans, George W & Honkapohja, Seppo, 1998. "Economic Dynamics with Learning: New Stability Results," Review of Economic Studies, Wiley Blackwell, vol. 65(1), pages 23-44, January.
  18. Sergey Slobodyan & Anna Bogomolova, & Dmitri Kolyuzhnov, 2006. "Stochastic Gradient versus Recursive Least Squares Learning," CERGE-EI Working Papers wp309, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  19. Woodford, Michael, 1999. "Optimal monetary policy inertia," CFS Working Paper Series 1999/09, Center for Financial Studies (CFS).
  20. Fabio Milani, 2007. "Learning and Time-Varying Macroeconomic Volatility," Working Papers 070802, University of California-Irvine, Department of Economics.
  21. M. H. Khalil Timamy, 2005. "Debate," Review of African Political Economy, Taylor & Francis Journals, vol. 32(104-105), pages 383-393, June.
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Citations

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Cited by:
  1. Gasteiger, Emanuel & Zhang, Shoujian, 2011. "Anticipation, learning and welfare: the case of distortionary taxation," MPRA Paper 30625, University Library of Munich, Germany.
  2. Evans, George & Honkapohja, Seppo, 2008. "Expectations, Learning and Monetary Policy: An Overview of Recent Research," SIRE Discussion Papers 2008-03, Scottish Institute for Research in Economics (SIRE).
  3. Ippei Fujiwara & Kazuo Fukuda & Ichiro Muto & Yosuke Shigemi & Wataru Takahashi, 2008. "Frontiers in Monetary Theory and Policy: Summary of the 2008 International Conference Organized by the Institute for Monetary and Economic Studies of the Bank of Japan," IMES Discussion Paper Series 08-E-18, Institute for Monetary and Economic Studies, Bank of Japan.

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