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Abstract

We review the recent work on interest rate setting, which emphasizes the desirability of designing policy to ensure stability under private agent learning. Appropriately designed expectations based rules can yield optimal rational expectations equilibria that are both determinate and stable under learning. Some simple instrument rules and approximate targeting rules also have these desirable properties. We take up various complications in implementing optimal policy, including the observability of key variables and the required knowledge of structural parameters. An additional issue that we take up concerns the implications of expectation shocks not arising from transitional learning effects.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0405008.

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Date of creation: 11 May 2004
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Handle: RePEc:wpa:wuwpma:0405008

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Related research

Keywords: commitment; interest rate setting; adaptive learning; stability; determinacy; expectations shocks;

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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
• E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
• D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

This paper has been announced in the following NEP Reports:

• NEP-ALL-2004-05-26 (All new papers)
• NEP-MON-2004-05-16 (Monetary Economics)

References

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