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Monetary Policy, Expectations and Commitment

  • George W. Evans

    ()

    (University of Oregon Economics Department)

  • Seppo Honkapohja

    (University of Cambridge)

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.

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Paper provided by University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2005-11.

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Length: 22
Date of creation: 27 May 2002
Date of revision: 06 Apr 2005
Handle: RePEc:ore:uoecwp:2005-11
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  1. Honkapohja, S. & Mitra, K., 2001. "Are Non-Fundamental Equilibria Learnable in Models of Monetary Policy?," University of Helsinki, Department of Economics 501, Department of Economics.
  2. 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.
  3. Michael Woodford, 1999. "Commentary : how should monetary policy be conducted in an era of price stability?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 277-316.
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