IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Robustifying Learnability

Listed author(s):
  • Robert J. Tetlow

    ()

    (Division of Research and Statistics Federal Reserve Board)

  • Peter von zur Muehlen

In recent years, the learnability of rational expectations equilibria (REE) and determinacy of economic structures have rightfully joined the usual performance criteria among the sought-after goals of policy design. Some contributions to the literature, including Bullard and Mitra (2001) and Evans and Honkapohja (2002), have made significant headway in establishing certain features of monetary policy rules that facilitate learning. However a treatment of policy design for learnability in worlds where agents have potentially misspecified their learning models has yet to surface. This paper provides such a treatment. We begin with the notion that because the profession has yet to settle on a consensus model of the economy, it is unreasonable to expect private agents to have collective rational expectations. We assume that agents have only an approximate understanding of the workings of the economy and that their learning the reduced forms of the economy is subject to potentially destabilizing perturbations. The issue is then whether a central bank can design policy to account for perturbations and still assure the learnability of the model. Our test case is the standard New Keynesian business cycle model. For different parameterizations of a given policy rule, we use structured singular value analysis (from robust control theory) to find the largest ranges of misspecifications that can be tolerated in a learning model without compromising convergence to an REE. In addition, we study the cost, in terms of performance in the steady state of a central bank that acts to robustify learnability on the transition path to REE.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.federalreserve.gov/pubs/feds/2005/200558/200558pap.pdf
File Function: main text
Download Restriction: no

File URL: http://repec.org/sed2006/up.29531.1139941395.pdf
Download Restriction: no

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 439.

as
in new window

Length:
Date of creation: 03 Dec 2006
Handle: RePEc:red:sed006:439
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
  2. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
  3. Ben S. Bernanke & Michael Woodford, 1997. "Inflation Forecasts and Monetary Policy," NBER Working Papers 6157, National Bureau of Economic Research, Inc.
  4. Woodford, Michael, 2000. "Optimal Monetary Policy Inertia," Seminar Papers 666, Stockholm University, Institute for International Economic Studies.
  5. Marcet, Albert & Nicolini, Juan Pablo, 1998. "Recurrent Hyperinflations and Learning," CEPR Discussion Papers 1875, C.E.P.R. Discussion Papers.
  6. Nicoletta Batini & Joseph Pearlman, 2002. "Too Much Too Soon: Instability and Indeterminacy with Forward-Looking Rules," Discussion Papers 08, Monetary Policy Committee Unit, Bank of England.
  7. James Bullard & Stefano Eusepi, 2005. "Did the Great Inflation Occur Despite Policymaker Commitment to a Taylor Rule?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 324-359, April.
  8. N/A, 1986. "Chapter II. The World Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 118(1), pages 18-29, November.
  9. Giordani, Paolo & Söderlind, Paul, 2002. "Solution of Macromodels with Hansen-Sargent Robust Policies: Some Extensions," SSE/EFI Working Paper Series in Economics and Finance 499, Stockholm School of Economics, revised 15 May 2003.
  10. Evans, George W. & Honkapohja, Seppo, 2002. "Adaptive learning and monetary policy design," Research Discussion Papers 29/2002, Bank of Finland.
  11. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
  12. Andrew Levin & Volker Wieland & John C. Williams, 1998. "Robustness of Simple Monetary Policy Rules under Model Uncertainty," NBER Working Papers 6570, National Bureau of Economic Research, Inc.
  13. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond.
  14. George W. Evans & Seppo Honkapohja, 2001. "Expectations and the Stability Problem for Optimal Monetary Policies," University of Oregon Economics Department Working Papers 2001-6, University of Oregon Economics Department, revised 03 Aug 2001.
  15. Garratt, Anthony & Hall, Stephen G., 1997. "E-equilibria and adaptive expectations: Output and inflation in the LBS model," Journal of Economic Dynamics and Control, Elsevier, vol. 21(7), pages 1149-1171, June.
  16. GEORGE W. EVANS & BRUCE McGOUGH, 2007. "Optimal Constrained Interest-Rate Rules," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(6), pages 1335-1356, 09.
  17. N/A, 1980. "Chapter III. The World Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 91(1), pages 43-67, February.
  18. Giannoni, Marc P., 2002. "Does Model Uncertainty Justify Caution? Robust Optimal Monetary Policy In A Forward-Looking Model," Macroeconomic Dynamics, Cambridge University Press, vol. 6(01), pages 111-144, February.
  19. Soderstrom, Ulf, 2002. " Monetary Policy with Uncertain Parameters," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(1), pages 125-145.
  20. J. Tetlow, Robert & von zur Muehlen, Peter, 2001. "Robust monetary policy with misspecified models: Does model uncertainty always call for attenuated policy?," Journal of Economic Dynamics and Control, Elsevier, vol. 25(6-7), pages 911-949, June.
  21. George W. Evans & Seppo Honkapohja, 2006. "Monetary Policy, Expectations and Commitment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(1), pages 15-38, 03.
  22. Ehrmann, M. & Smets, F., 2001. "Uncertain Potential Output: Implications for Monetary Policy," Papers 59, Quebec a Montreal - Recherche en gestion.
  23. Bennett T. McCallum, 1981. "On Non-Uniqueness in Rational Expectations Models: An Attempt at Perspective," NBER Working Papers 0684, National Bureau of Economic Research, Inc.
  24. Andrew Levin & John C. Williams, 2000. "The Performance of Forecast-Based Monetary Policy Rules under Model Uncertainty," Econometric Society World Congress 2000 Contributed Papers 1781, Econometric Society.
  25. Michael Woodford, 2003. "Optimal Interest-Rate Smoothing," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 861-886.
  26. George W. Evans & Seppo Honkapohja & Noah Williams, 2005. "Generalized Stochastic Gradient Learning," CESifo Working Paper Series 1576, CESifo Group Munich.
  27. Seppo Honkapohja & Kaushik Mitra, 2002. "Learning Stability in Economies with Heterogenous Agents," CESifo Working Paper Series 772, CESifo Group Munich.
  28. Robert Tetlow & Peter von zur Muehlen, 2004. "Avoiding Nash Inflation: Bayesian and Robus Responses to Model Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(4), pages 869-899, October.
  29. Latsis,, 1980. "Method and Appraisal in Economics," Cambridge Books, Cambridge University Press, number 9780521280501, October.
  30. George W. Evans & Bruce McGough, 2003. "Monetary Policy, Indeterminacy and Learning," University of Oregon Economics Department Working Papers 2003-34, University of Oregon Economics Department, revised 01 Apr 2004.
  31. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
  32. Athanasios Orphanides & Richard D. Porter & David L. Reifschneider & Robert J. Tetlow & Frederico Finan, 1999. "Errors in the measurement of the output gap and the design of monetary policy," Finance and Economics Discussion Series 1999-45, Board of Governors of the Federal Reserve System (U.S.).
  33. Coenen, Gunter, 2007. "Inflation persistence and robust monetary policy design," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 111-140, January.
  34. N/A, 1986. "Chapter I. The Home Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 118(1), pages 6-17, November.
  35. N/A, 1980. "Calendar of Economic Events April—June 1980," National Institute Economic Review, National Institute of Economic and Social Research, vol. 93(1), pages 80-82, August.
  36. Volker Wieland & Andrew Levin & John C. Williams, 1999. "The Performance of Forward-Looking Monetary Policy Rules under Model Uncertainty," Computing in Economics and Finance 1999 1153, Society for Computational Economics.
  37. Walsh, Carl E., 2005. "Parameter misspecification and robust monetary policy rules," Working Paper Series 0477, European Central Bank.
  38. Lubik, Thomas A. & Schorfheide, Frank, 2003. "Computing sunspot equilibria in linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 28(2), pages 273-285, November.
  39. Tetlow, Robert J. & von zur Muehlen, Peter, 2001. "Simplicity versus optimality: The choice of monetary policy rules when agents must learn," Journal of Economic Dynamics and Control, Elsevier, vol. 25(1-2), pages 245-279, January.
  40. N/A, 1986. "Chapter I. The Home Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 117(1), pages 5-19, August.
  41. Kaushik Mitra & James Bullard, 2004. "Determinacy, Learnability, and Monetary Policy Inertia," Royal Holloway, University of London: Discussion Papers in Economics 04/14, Department of Economics, Royal Holloway University of London, revised Jul 2004.
  42. N/A, 1980. "Chapter II. The Home Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 91(1), pages 27-42, February.
  43. -, 1986. "Escenarios de la economía mundial hasta 1990," Desarrollo Productivo 4557, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
  44. N/A, 1986. "Chapter I. The Home Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 116(1), pages 5-18, May.
  45. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August.
  46. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-1311, July.
  47. Ben S. Bernanke & Julio J. Rotemberg (ed.), 1997. "NBER Macroeconomics Annual 1997," MIT Press Books, The MIT Press, edition 1, volume 1, number 026252242x.
  48. Alexei Onatski & Noah Williams, 2003. "Modeling Model Uncertainty," NBER Working Papers 9566, National Bureau of Economic Research, Inc.
  49. N/A, 1986. "Chapter II. The World Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 116(1), pages 19-30, May.
  50. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  51. Alexei Onatski & James H. Stock, 2000. "Robust Monetary Policy Under Model Uncertainty in a Small Model of the U.S. Economy," NBER Working Papers 7490, National Bureau of Economic Research, Inc.
  52. N/A, 1980. "Chapter III. The World Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 93(1), pages 36-48, August.
  53. Ben S. Bernanke & Julio J. Rotemberg, 1997. "NBER Macroeconomics Annual 1997, Volume 12," NBER Books, National Bureau of Economic Research, Inc, number bern97-1, Enero.
  54. Bray, Margaret, 1982. "Learning, estimation, and the stability of rational expectations," Journal of Economic Theory, Elsevier, vol. 26(2), pages 318-339, April.
  55. Hansen, Lars Peter & Sargent, Thomas J., 2003. "Robust control of forward-looking models," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 581-604, April.
  56. N/A, 1986. "Chapte II. the World Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 115(1), pages 27-43, February.
  57. N/A, 1986. "Seasonal Patterns in the British Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 117(1), pages 33-42, August.
  58. N/A, 1980. "Chapter I. The World Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 92(1), pages 6-17, May.
  59. N/A, 1980. "Chapter I. The Economy in 1979," National Institute Economic Review, National Institute of Economic and Social Research, vol. 91(1), pages 8-26, February.
  60. N/A, 1980. "Chapter II. The Home Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 94(1), pages 31-46, November.
  61. N/A, 1986. "Chapter I. the Home Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 115(1), pages 6-26, February.
  62. -, 1980. "Economic relations of Latin America with Europe," Cuadernos de la CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number ns.n. edited by Cepal.
  63. Ben S. Bernanke & Julio J. Rotemberg, 1997. "Editorial in "NBER Macroeconomics Annual 1997, Volume 12"," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 1-6 National Bureau of Economic Research, Inc.
  64. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
  65. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
  66. Bray, Margaret M & Savin, Nathan E, 1986. "Rational Expectations Equilibria, Learning, and Model Specification," Econometrica, Econometric Society, vol. 54(5), pages 1129-1160, September.
  67. N/A, 1980. "Chapter III. The World Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 94(1), pages 47-61, November.
  68. repec:sae:niesru:v:118:y::i:1:p:82-88 is not listed on IDEAS
  69. N/A, 1980. "Chapter II. The Home Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 92(1), pages 18-32, May.
  70. Giannitsarou, Chryssi, 2005. "E-Stability Does Not Imply Learnability," Macroeconomic Dynamics, Cambridge University Press, vol. 9(02), pages 276-287, April.
  71. Prachowny,Martin F. J., 1986. "Money in the Macroeconomy," Cambridge Books, Cambridge University Press, number 9780521315944, October.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:red:sed006:439. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.