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On the Determinacy of Monetary Policy under Expectational Errors

  • Jagjit S. Chadha

    ()

  • Luisa Corrado

    ()

Forward looking agents with expectational errors provide a problem for monetary policy. We show that under such conditions a standard interest rate rule may not achieve determinacy. We suggest a modification to the standard policy rule that guarantees determinacy in this setting, which involves the policy maker co-ordinating inflation dynamics by responding to each of past, current and expected inflation. We show that this solution maps directly into Woodford’s (2000) timeless perspective. We trace the responses in an artificial economy and illustrate the extent to which macroeconomic persistence is reduced following the adoption of this rule.

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File URL: http://www.st-andrews.ac.uk/economics/CDMA/papers/wp0603.pdf
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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 200603.

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Date of creation: 15 Jan 2006
Date of revision: 15 Apr 2007
Handle: RePEc:san:cdmawp:0603
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