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Determinacy, Learnability, and Monetary Policy Inertia

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Author Info
James Bullard
Kaushik Mitra

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Abstract

We evaluate Taylor-type monetary policy rules from the perspective of which classes of rules most reliably induce determinacy and learnability of a rational expectations equilibrium. The context is a simple, forward-looking model of the macroeconomy widely used in the rapidly expanding literature in this area. The policy rules we consider have an inertial component, whereby the central bank can respond cautiously to economic events. We document that policy inertia can help alleviate problems of indeterminacy and explosive instability of equilibrium in this model, and that learnability of equilibrium is not impaired by policymaker caution. We conclude that this might be an important reason why central banks in the industrialized economies display considerable inertia when adjusting monetary policy in response to changing economic conditions.

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Paper provided by Department of Economics, University of York in its series Discussion Papers with number 00/43.

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Handle: RePEc:yor:yorken:00/43

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Related research
Keywords: Monetary policy rules determinacy learnability instrument instability.

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Find related papers by JEL classification:
E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Richard Clarida & Jordi Gali & Mark Gertler, 1997. "Monetary Policy Rules in Practice: Some International Evidence," NBER Working Papers 6254, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Kaushik Mitra & James Bullard, . "Learning About Monetary Policy Rules," Discussion Papers 00/41, Department of Economics, University of York. [Downloadable!]
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  3. Woodford, Michael, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(0), pages 1-35, Supplemen. [Downloadable!] (restricted)
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  4. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December. [Downloadable!] (restricted)
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  5. Bernanke, Ben S & Woodford, Michael, 1997. "Inflation Forecasts and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 653-84, November.
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  6. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April. [Downloadable!] (restricted)
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  8. Evans, George W. & Honkapohja, Seppo, 2000. "Expectations and the stability problem for optimal monetary policies," Discussion Paper Series 1: Economic Studies 2000,10, Deutsche Bundesbank, Research Centre. [Downloadable!]
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  9. McCallum, Bennett T., 1993. "Discretion versus policy rules in practice: two critical points : A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39, pages 215-220, December. [Downloadable!] (restricted)
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  11. Christina D. Romer & David H. Romer, 2000. "Federal Reserve Information and the Behavior of Interest Rates," American Economic Review, American Economic Association, vol. 90(3), pages 429-457, June. [Downloadable!] (restricted)
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  13. Charles T. Carlstrom & Timothy S. Fuerst, 2000. "Forward-looking versus backward-looking Taylor rules," Working Paper 0009, Federal Reserve Bank of Cleveland. [Downloadable!]
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  16. Caplin, Andrew & Leahy, John, 1996. "Monetary Policy as a Process of Search," American Economic Review, American Economic Association, vol. 86(4), pages 689-702, September. [Downloadable!] (restricted)
  17. Honkapohja, Seppo & Mitra, Kaushik, 2002. "Learning Stability in Economies with Heterogenous Agents," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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  18. Evans, George W. & Honkapohja, Seppo, 1999. "Learning dynamics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 7, pages 449-542 Elsevier. [Downloadable!] (restricted)
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  20. Fuhrer, Jeffrey C & Moore, George R, 1995. "Monetary Policy Trade-offs and the Correlation between Nominal Interest Rates and Real Output," American Economic Review, American Economic Association, vol. 85(1), pages 219-39, March.
  21. Robert E. Hall & N. Gregory Mankiw, 1994. "Nominal Income Targeting," NBER Working Papers 4439, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Giuseppe Ferrero, 2004. "Monetary policy and the transition to rational expectations," Computing in Economics and Finance 2004 19, Society for Computational Economics. [Downloadable!]
    Other versions:
  2. Preston, Bruce, 2005. "Learning about Monetary Policy Rules when Long-Horizon Expectations Matter," MPRA Paper 830, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  3. George W. Evans & Bruce McGough, 2003. "Monetary Policy, Indeterminacy and Learning," University of Oregon Economics Department Working Papers 2003-34, University of Oregon Economics Department, revised 01 Apr 2004. [Downloadable!]
    Other versions:
  4. George W. Evans & Bruce McGough, 2004. "Monetary Policy and Stable Indeterminacy with Inertia," University of Oregon Economics Department Working Papers 2004-4, University of Oregon Economics Department, revised 29 Mar 2004. [Downloadable!]
    Other versions:
  5. 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.). [Downloadable!]
    Other versions:
  6. James B. Bullard & Aarti Singh, 2007. "Worldwide macroeconomic stability and monetary policy rules," Working Papers 2006-040, Federal Reserve Bank of St. Louis. [Downloadable!]
  7. Stefano Eusepi, 2005. "Central bank transparency under model uncertainty," Staff Reports 199, Federal Reserve Bank of New York. [Downloadable!]
  8. Kaushik Mitra & Seppo Honkapohja, 2004. "Performance of Inflation Targeting Based On Constant Interest Rate Projections," Royal Holloway, University of London: Discussion Papers in Economics 04/15, Department of Economics, Royal Holloway University of London, revised Jul 2004. [Downloadable!]
    Other versions:
  9. George W. Evans & Bruce McGough, 2005. "Optimal Constrained Interest-rate Rules," University of Oregon Economics Department Working Papers 2005-9, University of Oregon Economics Department, revised 31 May 2006. [Downloadable!]
    Other versions:
  10. Bask, Mikael, 2007. "A case for interest rate smoothing," Research Discussion Papers 25/2007, Bank of Finland. [Downloadable!]
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