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Robust Stability of Monetary Policy Rules under Adaptive Learning

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  • Eric Gaus

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

Abstract

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.

Suggested Citation

  • Eric Gaus, 2013. "Robust Stability of Monetary Policy Rules under Adaptive Learning," Southern Economic Journal, Southern Economic Association, vol. 80(2), pages 439-453, October.
  • Handle: RePEc:sej:ancoec:v:80:2:y:2013:p:439-453
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    File URL: http://dx.doi.org/10.4284/0038-4038-2012.071
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    References listed on IDEAS

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    1. Adam, Klaus & Billi, Roberto M., 2006. "Optimal Monetary Policy under Commitment with a Zero Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1877-1905, October.
    2. Guido Ascari & Tiziano Ropele, 2009. "Trend Inflation, Taylor Principle, and Indeterminacy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(8), pages 1557-1584, December.
    3. George W. Evans & Seppo Honkapohja, 2006. "Monetary Policy, Expectations and Commitment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(1), pages 15-38, March.
    4. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
    5. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
    6. George W. Evans & Seppo Honkapohja, 2003. "Adaptive learning and monetary policy design," Proceedings, Federal Reserve Bank of Cleveland, pages 1045-1084.
    7. 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.
    8. John Duffy & Wei Xiao, 2007. "The Value of Interest Rate Stabilization Policies When Agents Are Learning," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(8), pages 2041-2056, December.
    9. 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.
    10. Milani, Fabio, 2007. "Expectations, learning and macroeconomic persistence," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2065-2082, October.
    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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    Citations

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    Cited by:

    1. Eric Gaus, 2013. "Time-Varying Parameters and Endogenous Learning Algorithms," Working Papers 13-02, Ursinus College, Department of Economics.
    2. Eric Gaus & Srikanth Ramamurthy, 2012. "Learning and Loss Functions: Comparing Optimal and Operational Monetary Policy Rules," Working Papers 14-01, Ursinus College, Department of Economics, revised 14 Dec 2013.
    3. Milani, Fabio, 2014. "Learning and time-varying macroeconomic volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 47(C), pages 94-114.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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