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Monetary Policy, Indeterminacy and Learning

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Abstract

The development of tractable forward looking models of monetary policy has lead to an explosion of research on the implications of adopting Taylor-type interest rate rules. Indeterminacies have been found to arise for some specifications of the interest rate rule, raising the possibility of inefficient fluctuations due to the dependence of expectations on extraneous “sunspots ”. Separately, recent work by a number of authors has shown that sunspot equilibria previously thought to be unstable under private agent learning can in some cases be stable when the observed sunspot has a suitable time series structure. In this paper we generalize the “common factor ”technique, used in this analysis, to examine standard monetary models that combine forward looking expectations and predetermined variables. We consider a variety of specifications that incorporate both lagged and expected inflation in the Phillips Curve, and both expected inflation and inertial elements in the policy rule. We find that some policy rules can indeed lead to learnable sunspot solutions and we investigate the conditions under which this phenomenon arises.

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  • George W. Evans & Bruce McGough, 2003. "Monetary Policy, Indeterminacy and Learning," CFS Working Paper Series 2003/37, Center for Financial Studies.
  • Handle: RePEc:cfs:cfswop:wp200337
    Note: This version was presented at the research conference "Expectations, Learning and Monetary Policy" August 2003 sponsored by the Deutsche Bundesbank, the Journal of Economic Dynamics and Control (JEDC) and the Center for Financial Studies (CFS). Corresponding author: George W. Evans, University of Oregon, E-mail: gevans@oregon.uoregon.edu
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    More about this item

    Keywords

    Monetary Policy; sunspots; expectations; learning; stability;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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