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Robust Learning Stability with Operational Monetary Policy Rules

We consider robust stability under learning of alternative interest-rate rules. By “robust stability” we mean stability of the rational expectations equilibrium, under discounted (constant gain) least-squares learning, for a range of gain parameters. We find that many interest-rate rules are not robust, in this sense, when operational forms of policy rules are employed. Rules are considered operational if they do not depend on contemporaneous values of endogenous aggregate variables. We consider a variety of interest-rate rules, including instrument rules, optimal reaction functions under discretion or commitment, and rules that approximate optimal policy under commitment. For some of the rules that aim to achieve optimal policy, we allow for an interest-rate stabilization motive in the policy objective. The expectations-based rules proposed in Evans and Honkapohja (2003, 2006) deliver robust learning stability. In contrast, many proposed alternatives become unstable under learning even at small values of the gain parameter.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 504.

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Date of creation: Nov 2008
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Handle: RePEc:chb:bcchwp:504
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  1. Evans, George & Honkapohja, Seppo, 2008. "Expectations, Learning and Monetary Policy: An Overview of Recent Research," SIRE Discussion Papers 2008-03, Scottish Institute for Research in Economics (SIRE).
  2. 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.
  3. Fabio Milani, 2005. "Adaptive Learning and Inflation Persistence," Working Papers 050607, University of California-Irvine, Department of Economics.
  4. Sergey Slobodyan & Anna Bogomolova, & Dmitri Kolyuzhnov, 2006. "Stochastic Gradient versus Recursive Least Squares Learning," CERGE-EI Working Papers wp309, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  5. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
  6. George W. Evans & Seppo Honkapohja, 2009. "Learning and Macroeconomics," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 421-451, 05.
  7. Bennett T. McCallum & Edward Nelson, 2000. "Timeless Perspectives vs. Discretionary Monetary Policy In Forward-Looking Models," NBER Working Papers 7915, National Bureau of Economic Research, Inc.
  8. Woodford, Michael, 1999. "Optimal monetary policy inertia," CFS Working Paper Series 1999/09, Center for Financial Studies (CFS).
  9. Wiliam Branch & George W. Evans, 2005. "A Simple Recursive Forecasting Model," University of Oregon Economics Department Working Papers 2005-3, University of Oregon Economics Department, revised 01 Feb 2005.
  10. James Bullard & Kaushik Mitra, 2002. "Learning about monetary policy rules," Working Papers 2000-001, Federal Reserve Bank of St. Louis.
  11. Evans, G.W. & Honkapohja ,S. & Williams, N., 2005. "Generalized Stochastic Gradient Learning," Cambridge Working Papers in Economics 0545, Faculty of Economics, University of Cambridge.
  12. James B. Bullard, 2006. "The learnability criterion and monetary policy," Review, Federal Reserve Bank of St. Louis, issue May, pages 203-217.
  13. George W. Evans & Seppo Honkapohja, 2004. "Adaptive learning and monetary policy design," Macroeconomics 0405008, EconWPA.
  14. Evans, G.W. & Guesnerie, R., 1992. "Rationalizability, Strong Rationality and Expectational Stability," DELTA Working Papers 92-03, DELTA (Ecole normale supérieure).
  15. Evans, George W. & Honkapohja, Seppo, 2002. "Monetary policy, expectations and commitment," Working Paper Series 0124, European Central Bank.
  16. 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.
  17. Milani, Fabio, 2007. "Expectations, learning and macroeconomic persistence," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2065-2082, October.
  18. George W. Evans & Seppo Honkapohja, . "Economic Dynamics with Learning: New Stability Results," Computing in Economics and Finance 1997 51, Society for Computational Economics.
  19. Fabio Milani, 2007. "Learning and Time-Varying Macroeconomic Volatility," Working Papers 070802, University of California-Irvine, Department of Economics.
  20. M. H. Khalil Timamy, 2005. "Debate," Review of African Political Economy, Taylor & Francis Journals, vol. 32(104-105), pages 383-393, June.
  21. Bennett T. McCallum, 1997. "Issues in the Design of Monetary Policy Rules," NBER Working Papers 6016, National Bureau of Economic Research, Inc.
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