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Robust Stability of Monetary Policy Rules under Adaptive Learning

  • Eric Gaus

    ()

    (?Ursinus College, 601 E Main Street, Collegeville, PA 19426-1000, USA;)

Recent research has explored how minor changes in expectation formation can change the stability properties of a model (Duffy and Xiao 2007; Evans and Honkapohja 2009). This article builds on this research by examining an economy subject to a variety of monetary policy rules under an endogenous learning algorithm proposed by Marcet and Nicolini (2003). The results indicate that operational versions of optimal discretionary rules are not robustly stable, as in Evans and Honkapohja (2009). In addition, commitment rules are not robust to minor changes in expectational structure and parameter values.

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File URL: http://dx.doi.org/10.4284/0038-4038-2012.071
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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 80 (2013)
Issue (Month): 2 (October)
Pages: 439-453

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Handle: RePEc:sej:ancoec:v:80:2:y:2013:p:439-453
Contact details of provider: Web page: http://www.southerneconomic.org/

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  1. Roberto M. Billi & Klaus Adam, 2004. "Optimal Monetary Policy under Commitment with a Zero Bound on Nominal Interest Rates," Computing in Economics and Finance 2004 67, Society for Computational Economics.
  2. Ascari, Guido & Ropele, Tiziano, 2007. "Trend Inflation, Taylor Principle and Indeterminacy," Kiel Working Papers 1332, Kiel Institute for the World Economy (IfW).
  3. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  4. George W. Evans & Seppo Honkapohja, 2003. "Adaptive learning and monetary policy design," Proceedings, Federal Reserve Bank of Cleveland, pages 1045-1084.
  5. Evans, George W. & Honkapohja, Seppo, 2002. "Monetary policy, expectations and commitment," Working Paper Series 0124, European Central Bank.
  6. Kaushik Mitra & James Bullard, . "Learning About Monetary Policy Rules," Discussion Papers 00/41, Department of Economics, University of York.
  7. Klein, Paul, 2000. "Using the generalized Schur form to solve a multivariate linear rational expectations model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1405-1423, September.
  8. Milani, Fabio, 2007. "Expectations, learning and macroeconomic persistence," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2065-2082, October.
  9. Jensen, Christian & McCallum, Bennett T., 2002. "The non-optimality of proposed monetary policy rules under timeless perspective commitment," Economics Letters, Elsevier, vol. 77(2), pages 163-168, October.
  10. Duffy, John & Xiao, Wei, 2004. "The value of interest rate stabilization polices when agents are learning," Working Papers 2004-02, University of New Orleans, Department of Economics and Finance.
  11. Howitt, Peter, 1992. "Interest Rate Control and Nonconvergence to Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 776-800, August.
  12. Branch, William A. & Evans, George W., 2006. "A simple recursive forecasting model," Economics Letters, Elsevier, vol. 91(2), pages 158-166, May.
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