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The dangers of commitment: Monetary policy with adaptive learning

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  • George Waters

Abstract

This paper studies a class of interest rate rules, introduced by Evans and Honkapohja (2001a, 2004), that respond to public expectations and to lagged variables. The policymaker commits to the extent that the interest rate responds to lagged output in an effort to influence public expectations. Simulation results show that full commitment, the commitment optimum under rational expectations, is not optimal under adaptive learning for any reasonable parameter values. Copyright Academy of Economics and Finance 2006

Suggested Citation

  • George Waters, 2006. "The dangers of commitment: Monetary policy with adaptive learning," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 30(1), pages 93-104, March.
    • Handle: RePEc:spr:jecfin:v:30:y:2006:i:1:p:93-104
    DOI: 10.1007/BF02834277
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    References listed on IDEAS

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    1. Bennett T. McCallum & Edward Nelson, 2004. "Timeless perspective vs. discretionary monetary policy in forward-looking models," Review, Federal Reserve Bank of St. Louis, vol. 86(Mar), pages 43-56.
    2. Waters, George A., 2009. "Learning, Commitment, And Monetary Policy," Macroeconomic Dynamics, Cambridge University Press, vol. 13(4), pages 421-449, September.
    3. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
    4. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    5. 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.
    6. Honkapohja, Seppo & Mitra, Kaushik, 2004. "Are non-fundamental equilibria learnable in models of monetary policy?," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1743-1770, November.
    7. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    1. Waters, George A., 2009. "Learning, Commitment, And Monetary Policy," Macroeconomic Dynamics, Cambridge University Press, vol. 13(4), pages 421-449, September.

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