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

Robustifying Learnability

Listed author(s):
  • Peter von zur Muehlen
  • Robert J. Tetlow

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. And while some contributions to the literature (for example Bullard and Mitra (2001) and Evans and Honkapohja (2002)) have made significant headway in establishing certain features of monetary policy rules that facilitate learning, a comprehensive treatment of policy design for learnability has yet to surface, especially for cases in which agents have potentially misspecified their learning models. This paper provides such a treatment. We argue that since even among professional economists a generally acceptable workhorse model of the economy has not been agreed upon, it is unreasonable to expect private agents to have collective rational expectations. We assume instead that agents have an approximate understanding of the workings of the economy and that their task of learning true reduced forms of the economy is subject to potentially destabilizing errors. We then ask: can a central bank set policy that accounts for learning errors but also succeeds in bounding them in a way that allows eventual learnability of the model, given policy. For different parameterizations of a given policy rule applied to a New Keynesian model, we use structured singular value analysis (from robust control) to find the largest ranges of misspecifications that can be tolerated in a learning model without compromising convergence to an REE. A parallel set of experiments seeks to determine the optimal stance (strong inflation as opposed to strong output stabilization) that allows for the greatest scope of errors in learning without leading to expectational instabilty in cases when the central bank designs both optimal and robust policy rules with commitment. We compare the features of all the rules contemplated in the paper with those that maximize economic performance in the true model, and we measure the performance cost of maximizing learnability under the various conditions mentioned here.

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://repec.org/sce2005/up.13279.1107356052.pdf
Download Restriction: no

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 437.

as
in new window

Length:
Date of creation: 11 Nov 2005
Handle: RePEc:sce:scecf5:437
Contact details of provider: Web page: http://comp-econ.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. 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.
  2. 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.
  3. Onatski, Alexei & Williams, Noah, 2002. "Modeling model uncertainty," Working Paper Series 0169, European Central Bank.
  4. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
  5. Evans, George W. & McGough, Bruce, 2003. "Monetary policy, indeterminacy and learning," CFS Working Paper Series 2003/37, Center for Financial Studies (CFS).
  6. 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.
  7. 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.
  8. Ehrmann, Michael & Smets, Frank, 2001. "Uncertain potential output: implications for monetary policy," Working Paper Series 0059, European Central Bank.
  9. 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.
  10. James B. Bullard & Stefano Eusepi, 2004. "Did the Great Inflation occur despite policymaker commitment to a Taylor rule?," Working Papers 2003-013, Federal Reserve Bank of St. Louis.
  11. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
  12. Ben S. Bernanke & Julio J. Rotemberg (ed.), 1997. "NBER Macroeconomics Annual 1997," MIT Press Books, The MIT Press, edition 1, volume 1, number 026252242x.
  13. Bruce McGough & George Evans, 2004. "Optimal Constrained Interest Rate Rules," Computing in Economics and Finance 2004 134, Society for Computational Economics.
  14. Andrew T.. Levin & Volker Wieland & John Williams, 1999. "Robustness of Simple Monetary Policy Rules under Model Uncertainty," NBER Chapters, in: Monetary Policy Rules, pages 263-318 National Bureau of Economic Research, Inc.
  15. George W. Evans & Seppo Honkapohja, 2003. "Adaptive learning and monetary policy design," Proceedings, Federal Reserve Bank of Cleveland, pages 1045-1084.
  16. Robert J. Tetlow & Peter von zur Muehlen, 1999. "Simplicity versus optimality the choice of monetary policy rules when agents must learn," Finance and Economics Discussion Series 1999-10, Board of Governors of the Federal Reserve System (U.S.).
  17. 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.
  18. George W. Evans & Seppo Honkapohja & Noah Williams, 2010. "Generalized Stochastic Gradient Learning," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(1), pages 237-262, 02.
  19. Woodford, M., 1999. "Optimal Monetary Policy Inertia.," Papers 666, Stockholm - International Economic Studies.
  20. 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.
  21. 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.
  22. 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.
  23. Ben S. Bernanke & Michael Woodford, 1997. "Inflation Forecasts and Monetary Policy," NBER Working Papers 6157, National Bureau of Economic Research, Inc.
  24. 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.
  25. 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.
  26. 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.
  27. James Bullard & Kaushik Mitra, "undated". "Determinacy, Learnability, and Monetary Policy Inertia," Discussion Papers 00/43, Department of Economics, University of York.
  28. Coenen, Günter, 2003. "Inflation persistence and robust monetary policy design," Working Paper Series 0290, European Central Bank.
  29. Soderstrom, Ulf, 2002. " Monetary Policy with Uncertain Parameters," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(1), pages 125-145.
  30. 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.
  31. 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.
  32. McCallum, Bennett T., 1983. "On non-uniqueness in rational expectations models : An attempt at perspective," Journal of Monetary Economics, Elsevier, vol. 11(2), pages 139-168.
  33. George W. Evans & Seppo Honkapohja, 2003. "Expectations and the Stability Problem for Optimal Monetary Policies," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 807-824.
  34. -, 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.
  35. 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.
  36. Marcet, Albert & Nicolini, Juan Pablo, 1998. "Recurrent Hyperinflations and Learning," CEPR Discussion Papers 1875, C.E.P.R. Discussion Papers.
  37. 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.
  38. 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.
  39. George W. Evans & Seppo Honkapohja, 2006. "Monetary Policy, Expectations and Commitment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(1), pages 15-38, 03.
  40. Alexei Onatski & James H. Stock, 1999. "Robust monetary policy under model uncertainty in a small model of the U.S. economy," Proceedings, Federal Reserve Bank of San Francisco.
  41. Kaushik Mitra & Seppo Honkapohja, 2004. "Learning Stability in Economies with Heterogenous Agents," Royal Holloway, University of London: Discussion Papers in Economics 04/17, Department of Economics, Royal Holloway University of London, revised Jul 2004.
  42. Robert J. Tetlow & Peter von zur Muehlen, 2002. "Avoiding Nash inflation: Bayesian and robust responses to model uncertainty," Finance and Economics Discussion Series 2002-9, Board of Governors of the Federal Reserve System (U.S.).
  43. 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.
  44. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers 1750, C.E.P.R. Discussion Papers.
  45. 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.
  46. Walsh, Carl E., 2005. "Parameter misspecification and robust monetary policy rules," Working Paper Series 0477, European Central Bank.
  47. 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.
  48. 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.
  49. 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.
  50. Bray, Margaret, 1982. "Learning, estimation, and the stability of rational expectations," Journal of Economic Theory, Elsevier, vol. 26(2), pages 318-339, April.
  51. 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.
  52. 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.
  53. Giannitsarou, Chryssi, 2005. "E-Stability Does Not Imply Learnability," Macroeconomic Dynamics, Cambridge University Press, vol. 9(02), pages 276-287, April.
  54. 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.
  55. 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.
  56. 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.
  57. 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.
  58. repec:sae:niesru:v:118:y::i:1:p:82-88 is not listed on IDEAS
  59. 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.
  60. 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.
  61. 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.).
  62. Ben S. Bernanke & Julio J. Rotemberg, 1997. "NBER Macroeconomics Annual 1997, Volume 12," NBER Books, National Bureau of Economic Research, Inc, number bern97-1.
  63. 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.
  64. Latsis,, 1980. "Method and Appraisal in Economics," Cambridge Books, Cambridge University Press, number 9780521280501, December.
  65. 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.
  66. Nicoletta Batini & Joe Pearlman, 2002. "Too Much Too Soon: Instability and Indeterminacy with Forward-Looking Rules," Computing in Economics and Finance 2002 182, Society for Computational Economics.
  67. Michael Woodford, 2003. "Optimal Interest-Rate Smoothing," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 861-886.
  68. -, 1986. "Escenarios de la economía mundial hasta 1990," Desarrollo Productivo 4557, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
  69. Prachowny,Martin F. J., 1986. "Money in the Macroeconomy," Cambridge Books, Cambridge University Press, number 9780521315944, December.
  70. 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.
  71. Bray, Margaret M & Savin, Nathan E, 1986. "Rational Expectations Equilibria, Learning, and Model Specification," Econometrica, Econometric Society, vol. 54(5), pages 1129-1160, September.
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:sce:scecf5:437. 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: (Christopher F. Baum)

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.