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Are Non-Fundamental Equilibria Learnable in Models of Monetary Policy?

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  • Seppo Honkapohja
  • Kaushik Mitra

Abstract

Recent models of monetary policy can have indeterminacy of equilibria. The indeterminacy property is often viewed as a difficulty of these models. We consider its significance using the learning approach to expectations formation by employing expectational stability as a robustness criterion for different equilibria. We derive the expectational stability and instability conditions for forward-looking multivariate models, both with and without lags, that cover a wide range of monetary policies proposed in the literature.

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Paper provided by Department of Economics, University of York in its series Discussion Papers with number 01/05.

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Handle: RePEc:yor:yorken:01/05

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Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
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Fax: (0)1904 323759
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Web page: http://www.york.ac.uk/economics/
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Keywords: Adaptive learning; stability; sunspots; monetary policy.;

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  1. Ben S. Bernanke & Michael Woodford, 1997. "Inflation forecasts and monetary policy," Proceedings, Federal Reserve Bank of Cleveland, pages 653-686.
  2. Orphanides, Athanasios, 1999. "The Quest for Prosperity Without Inflation," Working Paper Series 93, Sveriges Riksbank (Central Bank of Sweden).
  3. Evans, George W & Honkapohja, Seppo, 2003. "Adaptive Learning and Monetary Policy Design," CEPR Discussion Papers 3962, C.E.P.R. Discussion Papers.
  4. Evans, George W & Honkapohja, Seppo, 2001. "Expectations and the Stability Problem for Optimal Monetary Policies," CEPR Discussion Papers 2805, C.E.P.R. Discussion Papers.
  5. Evans, George W. & Honkapohja, Seppo, 2003. "Existence of adaptively stable sunspot equilibria near an indeterminate steady state," Journal of Economic Theory, Elsevier, vol. 111(1), pages 125-134, July.
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  7. Evans, George W. & Honkapohja, Seppo, 2003. "Expectational stability of stationary sunspot equilibria in a forward-looking linear model," Journal of Economic Dynamics and Control, Elsevier, vol. 28(1), pages 171-181, October.
  8. Woodford, M., 1999. "Optimal Monetary Policy Inertia.," Papers 666, Stockholm - International Economic Studies.
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  10. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
  11. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
  12. Honkapohja, Seppo & Mitra, Kaushik, 2002. "Performance of monetary policy with internal central bank forecasting," Working Paper Series 0127, European Central Bank.
  13. Wieland, Volker, 2003. "Monetary Policy and Uncertainty about the Natural Unemployment Rate," CEPR Discussion Papers 3811, C.E.P.R. Discussion Papers.
  14. Svensson, Lars E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Seminar Papers 646, Stockholm University, Institute for International Economic Studies.
  15. Bennett T. McCallum, 2001. "Monetary policy analysis in models without money," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 145-164.
  16. Julio J. Rotemberg & Michael Woodford, 1999. "Interest Rate Rules in an Estimated Sticky Price Model," NBER Chapters, in: Monetary Policy Rules, pages 57-126 National Bureau of Economic Research, Inc.
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  18. Chiappori, P.A. & Geoffard, P.Y. & Guesnerie, R., 1990. "Sunspot Fluctuations around a Steady State: The Case of Multidimensional One-Step forward Looking Economic Models," DELTA Working Papers 90-02, DELTA (Ecole normale supérieure).
  19. Bennett T. McCallum, 2001. "Inflation Targeting and the Liquidity Trap," Working Papers Central Bank of Chile 112, Central Bank of Chile.
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  22. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
  23. Evans, George W. & Honkapohja, Seppo & Honkapohja, Seppo, 1994. "Learning, convergence, and stability with multiple rational expectations equilibria," European Economic Review, Elsevier, vol. 38(5), pages 1071-1098, May.
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  25. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, number 9780521589819.
  26. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
  27. 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.
  28. Evans, George W., 1989. "The fragility of sunspots and bubbles," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 297-317, March.
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  31. repec:nbr:nberwo:8225 is not listed on IDEAS
  32. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary policy rules in practice," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
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