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Is the Friedman Rule Stabilizing? Some Unpleasant Results in a Heterogeneous Expectations Framework

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  • Mattia Guerini

    (Sant'Anna School of Advanced Studies, Pisa)

Abstract

The recent economic crisis gave proof of the fact that the Taylor rule is no more that good instrument as it was thought to be just ten years ago; this might be due to the fact that agents acting in the economy hold Heterogeneous Expectations (HE). In a recent paper Anufriev et al. (2013) suggest that a way to force stability on the economic system is to adopt a more aggressive Taylor rule. In the present paper a standard NK-DSGE is considered in order to investigate whether a Friedman k-percent monetary policy rule may be a valid instrument to counteract the instability created by the presence of HE in a framework à la Brock and Hommes (1997). The model here presented suggests that when such a money supply rule is adopted by the Central Bank, stability strongly depends on the intensity of choice, which represents the ability of the agents to switch toward the best available predictor.

Suggested Citation

  • Mattia Guerini, 2013. "Is the Friedman Rule Stabilizing? Some Unpleasant Results in a Heterogeneous Expectations Framework," DISCE - Working Papers del Dipartimento di Economia e Finanza def003, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    • Handle: RePEc:ctc:serie1:def003
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    File URL: http://dipartimenti.unicatt.it/economia-finanza-def003.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Heterogeneous Expectations; Friedman Monetary Policy Rule; Macroeconomic Stability;
    All these keywords.

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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