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Adaptive learning and monetary policy design

Author

Listed:
  • George W. Evans

    (University of Oregon)

  • Seppo Honkapohja

    (University of Helsinki & Bank of Finland)

Abstract

We review the recent work on interest rate setting, which emphasizes the desirability of designing policy to ensure stability under private agent learning. Appropriately designed expectations based rules can yield optimal rational expectations equilibria that are both determinate and stable under learning. Some simple instrument rules and approximate targeting rules also have these desirable properties. We take up various complications in implementing optimal policy, including the observability of key variables and the required knowledge of structural parameters. An additional issue that we take up concerns the implications of expectation shocks not arising from transitional learning effects.

Suggested Citation

  • George W. Evans & Seppo Honkapohja, 2004. "Adaptive learning and monetary policy design," Macroeconomics 0405008, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpma:0405008
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    References listed on IDEAS

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    More about this item

    Keywords

    commitment; interest rate setting; adaptive learning; stability; determinacy; expectations shocks;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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