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Expectations, learning and monetary policy: an overview of recent research

  • Evans , George W

    (University of Oregon and University of St. Andrews)

  • Honkapohja, Seppo

    ()

    (Bank of Finland and University of Cambridge)

Expectations about the future are central for determination of current macroeconomic outcomes and the formulation of monetary policy. Recent literature has explored ways for supplementing the benchmark of rational expectations with explicit models of expectations formation that rely on econometric learning. Some apparently natural policy rules turn out to imply expectational instability of private agents’ learning. We use the standard New Keynesian model to illustrate this problem and survey the key results for interest-rate rules that deliver both uniqueness and stability of equilibrium under econometric learning. We then consider some practical concerns such as measurement errors in private expectations, observability of variables and learning of structural parameters required for policy. We also discuss some recent applications, including policy design under perpetual learning, estimated models with learning, recurrent hyperinflation, and macroeconomic policy to combat liquidity traps and deflation.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0732netti.pdf
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Paper provided by Bank of Finland in its series Research Discussion Papers with number 32/2007.

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Length: 49 pages
Date of creation: 14 Dec 2007
Date of revision:
Handle: RePEc:hhs:bofrdp:2007_032
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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