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Determinacy, Learnability, and Monetary Policy Inertia

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  • James Bullard
  • Kaushik Mitra

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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Keywords: Monetary policy rules; determinacy; learnability; instrument instability.;

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