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Learning about Monetary Policy Rules when the Cost Channel Matters

Author

Listed:
  • Llosa Gonzalo

    (UCLA)

  • Tuesta Vicente

    (Banco Central de Reserva del Perú)

Abstract

We study how the stability of rational expectations equilibrium may be affected by monetary policy when agents learn using adaptive learning (E-stability concept) and the cost channel of monetary policy matters. We focus on both instrumental taylor-type rules and optimal rules. We show, analytically, that standard instrument rules -contemporaneous and forecast based rules - can easily induce indeterminacy and expectational instability when the cost channel is present. Overall, a naive application of the Taylor principle in this setting could be misleading. Regarding optimal rules, we find that "expectational-based" rules, under discretion and commitment, do not always induce determinate and E-stable equilibrium. This result stands in contrast to the findings of Evans and Honkapohja (2003) for for the baseline “New Keynessian" model.

Suggested Citation

  • Llosa Gonzalo & Tuesta Vicente, 2007. "Learning about Monetary Policy Rules when the Cost Channel Matters," Working Papers 2007-014, Banco Central de Reserva del Perú.
    • Handle: RePEc:rbp:wpaper:2007-014
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Monetary Policy Rules; Cost Channel; Indeterminacy;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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