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Controllability under rational expectations

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  • Hughes Hallett Andrew
  • Di Bartolomeo Giovanni
  • Acocella Nicola

Abstract

We show that rational expectations do not affect the controllability of an economic system, either in its static or in its dynamic version, even though their introduction in many other circumstances may make it impossible for the policymaker to affect certain variables due to policy invariance, policy neutrality or time inconsistency problems. The controllability conditions stated by Tinbergen and subsequent authors continue to hold under rational expectations; and when they are satisfied rational expectations may even enhance the power to control an economy over time. This is important because it shows that an underlying equilibrium can exist even if our conventional optimisation techniques lead to policy invariance, neutrality or time inconsistency. We provide examples of our results in the context of recent monetary policy debates.

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Paper provided by Department of Communication, University of Teramo in its series wp.comunite with number 0042.

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Date of creation: May 2008
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Handle: RePEc:ter:wpaper:0042

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Web page: http://wp.comunite.it/

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  1. Svensson, Lars & Faust, Jon, 1999. "The Equilibrium Degree of Transparency and Control in Monetary Policy," Seminar Papers, Stockholm University, Institute for International Economic Studies 669, Stockholm University, Institute for International Economic Studies.
  2. Fisher, P. G. & Hallett, A. J. Hughes, 1988. "Efficient solution techniques for linear and non-linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 12(4), pages 635-657, November.
  3. Stefano Eusepi & Bruce Preston, 2007. "Central Bank Communication and Expectations Stabilization," NBER Working Papers 13259, National Bureau of Economic Research, Inc.
  4. Jeffery D. Amato & Hyun Song Shin & Stephen Morris, 2003. "Communication and monetary policy," BIS Working Papers 123, Bank for International Settlements.
  5. Hallett, A. Hughes & Ma, Y. & Yin, Y. P., 1996. "Hybrid algorithms with automatic switching for solving nonlinear equation systems," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 20(6-7), pages 1051-1071.
  6. Glenn D. Rudebusch & John C. Williams, 2008. "Revealing the Secrets of the Temple: The Value of Publishing Central Bank Interest Rate Projections," NBER Chapters, in: Asset Prices and Monetary Policy, pages 247-289 National Bureau of Economic Research, Inc.
  7. Hughes Hallett, Andrew J, 1989. "Econometrics and the Theory of Economic Policy: The Tinbergen-Theil Contributions 40 Years On," Oxford Economic Papers, Oxford University Press, vol. 41(1), pages 189-214, January.
  8. Alesina, Alberto & Tabellini, Guido, 1987. "Rules and Discretion with Noncoordinated Monetary and Fiscal Policies," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 25(4), pages 619-30, October.
  9. Di Bartolomeo Giovanni & Acocella Nicola & Hughes Hallett Andrew, 2008. "The existence of Nash equilibria in n-player LQ-games, with applications to international monetary and trade agreements," wp.comunite, Department of Communication, University of Teramo 0040, Department of Communication, University of Teramo.
  10. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, American Economic Association, vol. 77(4), pages 647-66, September.
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Cited by:
  1. Acocella, Nicola & Di Bartolomeo, Giovanni & Hughes Hallett, Andrew, 2008. "When Can Central Banks Anchor Expectations? Policy communication and controllability," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7078, C.E.P.R. Discussion Papers.

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