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Robust learning stability with operational monetary policy rules

  • Evans , George W

    (University of Oregon and University of St. Andrews)

  • Honkapohja, Seppo

    ()

    (Bank of Finland and University of Cambridge)

We consider the robust stability of a rational expectations equilibrium, which we define as stability under discounted (constant gain) least-squares learning, for a range of gain parameters. We find that for operational forms of policy rules, ie rules that do not depend on contemporaneous values of endogenous aggregate variables, many interest-rate rules do not exhibit robust stability. 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 reaction functions 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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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0731netti.pdf
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Paper provided by Bank of Finland in its series Research Discussion Papers with number 31/2007.

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Length: 28 pages
Date of creation: 13 Dec 2007
Date of revision:
Handle: RePEc:hhs:bofrdp:2007_031
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/

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  1. Michael Woodford, 1999. "Optimal Monetary Policy Inertia," NBER Working Papers 7261, National Bureau of Economic Research, Inc.
  2. Evans, G.W. & Guesnerie, R., 1992. "Rationalizability, Strong Rationality and Expectational Stability," DELTA Working Papers 92-03, DELTA (Ecole normale supérieure).
  3. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  4. Fabio Milani, 2007. "Learning and Time-Varying Macroeconomic Volatility," Working Papers 070802, University of California-Irvine, Department of Economics.
  5. George W. Evans & Seppo Honkapohja, 2002. "Monetary Policy, Expectations and Commitment," University of Oregon Economics Department Working Papers 2005-11, University of Oregon Economics Department, revised 06 Apr 2005.
  6. Branch, William A. & Evans, George W., 2006. "A simple recursive forecasting model," Economics Letters, Elsevier, vol. 91(2), pages 158-166, May.
  7. Fabio Milani, 2005. "Expectations, Learning and Macroeconomic Persistence," Working Papers 050608, University of California-Irvine, Department of Economics.
  8. Sergey Slobodyan & Anna Bogomolova & Dmitri Kolyuzhnov, 2006. "Stochastic Gradient versus Recursive Least Squares Learning," Computing in Economics and Finance 2006 446, Society for Computational Economics.
  9. George W. Evans & Seppo Honkapohja, . "Economic Dynamics with Learning: New Stability Results," Computing in Economics and Finance 1997 51, Society for Computational Economics.
  10. 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.
  11. Evans, George W. & Honkapohja, Seppo, 2002. "Adaptive learning and monetary policy design," Research Discussion Papers 29/2002, Bank of Finland.
  12. 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).
  13. George W. Evans & Seppo Honkapohja & Noah Williams, 2005. "Generalized Stochastic Gradient Learning," University of Oregon Economics Department Working Papers 2005-17, University of Oregon Economics Department, revised 18 May 2008.
  14. George W. Evans & Seppo Honkapohja, 2009. "Learning and Macroeconomics," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 421-451, 05.
  15. James B. Bullard, 2006. "The learnability criterion and monetary policy," Review, Federal Reserve Bank of St. Louis, issue May, pages 203-217.
  16. Bennett T. McCallum & Edward Nelson, 2004. "Timeless perspective vs. discretionary monetary policy in forward-looking models," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 43-56.
  17. James Bullard & Kaushik Mitra, 2002. "Learning about monetary policy rules," Working Papers 2000-001, Federal Reserve Bank of St. Louis.
  18. Fabio Milani, 2005. "Adaptive Learning and Inflation Persistence," Macroeconomics 0506013, EconWPA.
  19. John Duffy & Wei Xiao, 2006. "The Value of Interest Rate Stabilization Policies When Agents are Learning," Working Papers 284, University of Pittsburgh, Department of Economics, revised Oct 2006.
  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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