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Monetary Policy, Expectations and Commitment

Commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies. A number of interest-rate reaction functions and instrument rules have been proposed to implement or approximate commitment policy. We assess these rules in terms of whether they lead to a rational expectations equilibrium that is both locally determinate and stable under adaptive learning by private agents. A reaction function that appropriately depends explicitly on private sector expectations performs particularly well on both counts. Copyright The editors of the "Scandinavian Journal of Economics", 2006 .

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9442.2006.00437.x
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Article provided by Wiley Blackwell in its journal The Scandinavian Journal of Economics.

Volume (Year): 108 (2006)
Issue (Month): 1 (03)
Pages: 15-38

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Handle: RePEc:bla:scandj:v:108:y:2006:i:1:p:15-38
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  1. George W. Evans & Seppo Honkapohja, 2003. "Expectations and the Stability Problem for Optimal Monetary Policies," Review of Economic Studies, Wiley Blackwell, vol. 70(4), pages 807-824, October.
  2. Honkapohja, S. & Mitra, K., 2001. "Are Non-Fundamental Equilibria Learnable in Models of Monetary Policy?," University of Helsinki, Department of Economics 501, Department of Economics.
  3. Michael Woodford, 1999. "Commentary : how should monetary policy be conducted in an era of price stability?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 277-316.
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