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Interest Rate Rules with Heterogeneous Expectations

  • Anufriev, M.

    ()

    (Universiteit van Amsterdam)

  • Assenza, T.

    ()

    (Universiteit van Amsterdam)

  • Hommes, C.H.

    ()

    (Universiteit van Amsterdam)

  • Massaro, D.

    ()

    (Universiteit van Amsterdam)

Recent macroeconomic literature stressed the importance of expectations heterogeneity in the formulation of monetary policy. We use a stylized macro model of Howitt (1992) to investigate the dynamical consequences of alternative interest rate rules when agents have heterogeneous expectations and update their beliefs over time along the lines of Brock and Hommes (1997). We find that the outcome of different monetary policies in terms of stability crucially depends on the ecology of forecasting rules and on the intensity of choice among different predictors. We also show that, when agents have heterogeneous expectations, an interest rate rule that obeys the Taylor principle does not always lead the system to converge to the rational expectations equilibrium but multiple equilibria may persist.

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Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 08-08.

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Date of creation: 2008
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Handle: RePEc:ams:ndfwpp:08-08
Contact details of provider: Postal: Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands
Phone: + 31 20 525 52 58
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Web page: http://www.fee.uva.nl/cendef/
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  1. Honkapohja, S. & Evans, G.W., 2000. "Expectations and the Stability Problem for Optimal Monetary Policies," University of Helsinki, Department of Economics 481, Department of Economics.
  2. Hommes, Cars H., 2006. "Heterogeneous Agent Models in Economics and Finance," Handbook of Computational Economics, in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 23, pages 1109-1186 Elsevier.
  3. Emiliano Santoro & Damjan Pfajfar, 2006. "Heterogeneity and learning in inflation expectation formation: an empirical assessment," Department of Economics Working Papers 0607, Department of Economics, University of Trento, Italia.
  4. George Evans & William Branch, 2003. "Intrinsic Heterogeneity in Expectation Formation," Computing in Economics and Finance 2003 312, Society for Computational Economics.
  5. Adam, Klaus, 2005. "Experimental Evidence on the Persistence of Output and Inflation," CEPR Discussion Papers 4885, C.E.P.R. Discussion Papers.
  6. Hommes, Cars & Wagener, Florian, 2010. "Does eductive stability imply evolutionary stability?," Journal of Economic Behavior & Organization, Elsevier, vol. 75(1), pages 25-39, July.
  7. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  8. repec:att:wimass:9530 is not listed on IDEAS
  9. Berardi, Michele, 2007. "Heterogeneity and misspecifications in learning," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3203-3227, October.
  10. William A. Branch, 2004. "The Theory of Rationally Heterogeneous Expectations: Evidence from Survey Data on Inflation Expectations," Economic Journal, Royal Economic Society, vol. 114(497), pages 592-621, 07.
  11. Brock, W.A. & Hommes, C.H. & Wagener, F.O.O., 2002. "Evolutionary dynamics in markets with many trader types," CeNDEF Working Papers 02-10, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  12. William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, vol. 65(5), pages 1059-1096, September.
  13. Branch, William A. & McGough, Bruce, 2009. "A New Keynesian model with heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 33(5), pages 1036-1051, May.
  14. Alex Brazier & Richard Harrison & Mervyn King & Tony Yates, 2006. "The danger of inflating expectations of macroeconomic stability: heuristic switching in an overlapping generations monetary model," Bank of England working papers 303, Bank of England.
  15. 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.
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