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Heterogeneous expectations, Taylor rules and the merit of monetary policy inertia

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  • Gasteiger, Emanuel

Abstract

We present new results for the performance of Taylor rules in a New Keynesian model with heterogeneous expectations. Agents have either rational or adaptive expectations. We find that depending on the particular rule, expectational heterogeneity can create or increase the set of policies that leads to local explosiveness. This is a new level of destabilization compared to what is known. In addition, we demonstrate that policy inertia is an effective tool to safeguard the economy against local explosiveness. Thus, we provide a rationalization for central banks to adjust interest rates with notable inertia in response to shocks.

Suggested Citation

  • Gasteiger, Emanuel, 2011. "Heterogeneous expectations, Taylor rules and the merit of monetary policy inertia," MPRA Paper 31004, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:31004
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Monetary Policy; Taylor Rules; Heterogeneous Expectations;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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