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Monetary Policy, Expectations and Commitment

Author

Listed:
  • George W. Evans

    () (University of Oregon Economics Department)

  • Seppo Honkapohja

    (University of Cambridge)

Abstract

This is a revised and shortened version of Working Paper 2002-11. Commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies. A number of interest rate reaction functions and instrument rules have been proposed to implement or approximate commitment policy. We assess these rules in terms of whether they lead to an RE equilibrium that is both locally determinate and stable under adaptive learning by private agents. A reaction function that appropriately depends explicitly on private expectations performs particularly well on both counts.

Suggested Citation

  • 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.
  • Handle: RePEc:ore:uoecwp:2005-11
    as

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    File URL: http://economics.uoregon.edu/papers/UO-2005-11_Evans_Commitment.pdf
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    References listed on IDEAS

    as
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    13. Michael Woodford, 1999. "Optimal monetary policy inertia," Proceedings, Federal Reserve Bank of San Francisco.
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    More about this item

    Keywords

    Commitment; interest rate setting; adaptive learning; stability; determinacy;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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