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Monetary Policy, Expectations and Commitment

Listed author(s):
  • George W. Evans
  • Seppo Honkapohja

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. Svensson, L.E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Papers 646, Stockholm - International Economic Studies.
  2. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
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  4. Bruce Preston, 2005. "Learning about Monetary Policy Rules when Long-Horizon Expectations Matter," International Journal of Central Banking, International Journal of Central Banking, vol. 1(2), September.
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  18. Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
  19. Honkapohja, Seppo & Mitra, Kaushik, 2001. "Are Non-Fundamental Equilibria Learnable in Models of Monetary Policy?," CEPR Discussion Papers 2846, C.E.P.R. Discussion Papers.
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