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Adaptive Learning and Monetary Policy Design

  • Evans, George W.
  • Honkapohja, Seppo

We review the recent work on interest rate setting, which emphasizes the desirability of designing policy to ensure stability under learning. Appropriately designed expectations-based rules can yield optimal rational expectations equilibria that are both determinate and stable under learning. Some simple instrument rules and approximate targeting rules also have these desirable properties. We discuss various complications in implementing optimal policy, including the observability of key variables and the required knowledge of structural parameters. An additional issue that we take up concerns the implications of expectation shocks not arising from transitional learning effects.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3962.

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Date of creation: Jul 2003
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Handle: RePEc:cpr:ceprdp:3962
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  1. 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.
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  12. Evans, George W & Ramey, Garey, 2001. "Adaptive Expectations, Underparameterization and the Lucas Critique," University of California at San Diego, Economics Working Paper Series qt41f2h196, Department of Economics, UC San Diego.
  13. Athanasios Orphanides & John C. Williams, 2002. "Imperfect knowledge, inflation expectations, and monetary policy," Finance and Economics Discussion Series 2002-27, Board of Governors of the Federal Reserve System (U.S.).
  14. Kaushik Mitra & James Bullard, 2004. "Determinacy, Learnability, and Monetary Policy Inertia," Royal Holloway, University of London: Discussion Papers in Economics 04/14, Department of Economics, Royal Holloway University of London, revised Jul 2004.
  15. R. Guesnerie, 2002. "Anchoring Economic Predictions in Common Knowledge," Econometrica, Econometric Society, vol. 70(2), pages 439-480, March.
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  17. Bruce Preston, 2003. "Learning about monetary policy rules when long-horizon expectations matter," FRB Atlanta Working Paper 2003-18, Federal Reserve Bank of Atlanta.
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  19. McCallum, Bennett T & Nelson, Edward, 2001. "Timeless Perspective Vs Discretionary Monetary Policy in Forward-Looking Models," CEPR Discussion Papers 2752, C.E.P.R. Discussion Papers.
  20. 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.
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  24. Sargent, Thomas J., 1993. "Bounded Rationality in Macroeconomics: The Arne Ryde Memorial Lectures," OUP Catalogue, Oxford University Press, number 9780198288695, June.
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  26. Woodford, Michael, 1999. "Optimal monetary policy inertia," CFS Working Paper Series 1999/09, Center for Financial Studies (CFS).
  27. Honkapohja, Seppo & Mitra, Kaushik, 2005. "Performance of monetary policy with internal central bank forecasting," Journal of Economic Dynamics and Control, Elsevier, vol. 29(4), pages 627-658, April.
  28. 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.
  29. Seppo Honkapohja & Kaushik Mitra & George W. Evans, 2011. "Notes on Agents¡¯ Behavioral Rules Under Adaptive Learning and Studies of Monetary Policy," CDMA Working Paper Series 201102, Centre for Dynamic Macroeconomic Analysis.
  30. Bennett T. McCallum, 1999. "Recent developments in the analysis of monetary policy rules," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 3-12.
  31. Robert E. Hall, 1984. "Monetary strategy with an elastic price standard," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 137-167.
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