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Monetary policy and learning from the central bank's forecast

Listed author(s):
  • Muto, Ichiro

We examine the expectational stability (E-stability) of rational expectations equilibrium (REE) in a standard New Keynesian model in which private agents refer to the central bank's forecast in the process of adaptive learning. To satisfy the E-stability condition in this environment, the central bank must respond more strongly to the expected inflation rate than the extent to which the Taylor principle suggests. However, the central bank's strong reaction to the expected inflation rate raises the possibility of indeterminacy of the REE. In considering these problems, a robust policy requires responding to the current inflation rate to a certain degree.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 1 (January)
Pages: 52-66

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:1:p:52-66
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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  1. Evans, George W. & Honkapohja, Seppo, 2002. "Monetary policy, expectations and commitment," Working Paper Series 0124, European Central Bank.
  2. Jim Granato & Eran Guse & Sunny Wong, 2006. "Learning From the Expectations of Others," Computing in Economics and Finance 2006 449, Society for Computational Economics.
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  4. Guse, Eran A., 2005. "Stability properties for learning with heterogeneous expectations and multiple equilibria," Journal of Economic Dynamics and Control, Elsevier, vol. 29(10), pages 1623-1642, October.
  5. George W. Evans & Seppo Honkapohja, 2002. "Adaptive Learning and Monetary Policy Design," University of Oregon Economics Department Working Papers 2002-18, University of Oregon Economics Department, revised 04 Mar 2004.
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  17. Teruyoshi Kobayashi & Ichiro Muto, 2011. "A note on expectational stability under non-zero trend inflation," Discussion Papers 1102, Graduate School of Economics, Kobe University.
  18. Bennett T. McCallum, 2006. "E-Stability vis-a-vis Determinacy Results for a Broad Class of Linear Rational Expectations Models," NBER Working Papers 12441, National Bureau of Economic Research, Inc.
  19. McCallum, Bennett T., 1983. "On non-uniqueness in rational expectations models : An attempt at perspective," Journal of Monetary Economics, Elsevier, vol. 11(2), pages 139-168.
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