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On the stability properties of optimal interest rules under learning

  • Michele Berardi

In recent literature on monetary policy, it has been argued that a sensible policy rule should be able to induce learnability of the fundamental equilibrium: if private agents update their beliefs over time using adaptive learning technques, they should be able to converge towards rationality. Evans and Honkapohja (2003) showed that in a New Keynesian model an expectations based rule has such a desirable property, while a fundamentals based one does not. In order to implement an expectations based rule, though, the policymaker needs to observe private sector expectations. We show that there exists an alternative rule, based only on fundamentals, that can achieve the same positive results in terms of stability of private sector?s learning dynamics. Moreover, such a rule is learnable by the policymaker, and the combined learning dynamics of the private sector and the central bank make the economy converge to the fundamental equilibrium.

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File URL: http://www.socialsciences.manchester.ac.uk/medialibrary/cgbcr/discussionpapers/dpcgbcr155.pdf
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Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 155.

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Length: 21 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:man:cgbcrp:155
Contact details of provider: Postal: Manchester M13 9PL
Phone: (0)161 275 4868
Fax: (0)161 275 4812
Web page: http://www.socialsciences.manchester.ac.uk/subjects/economics/our-research/centre-for-growth-and-business-cycle-research/

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  1. 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.
  2. Athanasios Orphanides & John C. Williams, 2002. "Imperfect knowledge, inflation expectations, and monetary policy," Working Paper Series 2002-04, Federal Reserve Bank of San Francisco.
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