Expectations and the Stability Problem for Optimal Monetary Policies

By George W. Evans, Seppo Honkapohja. Social Science Research Network, 2003

369 citations recorded by the source corpus.

A fundamentals based monetary policy rule, which would be the optimal monetary policy without commitment when private agents have perfectly rational expectations, is unstable if in fact these agents follow standard adaptive learning rules. This problem can be overcome if private expectations are observed and suitably incorporated into the policy maker's optimal rule. These strong results extend to the case in which there is simultaneous learning by the policy maker and the private agents. Our findings show the importance of conditioning policy appropriately, not just on fundamentals, but also directly on observed household and firm expectations.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/1f8a9601b3780eb1d008ab25454fdd31fbd1819d

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Citations in the corpus

The Term Structure of Inflation Expectations (2012, methodology): “To aid the interpretation of our empirical results, we rewrite the spot interest rate in a form that is similar to the theoretical work on optimal monetary policy (e.g., Evans and Honkapohja, 2003).”
Learning and Macroeconomics (2009, methodology): “Local stability results for models of type (21) were developed by Evans and Honkapohja (1994) and Evans and Honkapohja (2003b).”
Macroeconomic Analysis Without the Rational Expectations Hypothesis (2013, background): “Authors such as Bullard and Mitra (2002) and Evans and Honkapohja (2003, 2006) propose as a design criterion for a monetary policy rule not only that the rule should be consistent with a desirable REE, but that the rule should imply that learning dynamics should converge to that REE, so that the…”
Determinacy, Learnability, and Monetary Policy Inertia (2000, background): “These conditions show that a large enough value of φr will always result in determinacy since this contributes to satisfaction of all of the conditions (7), (8), and (10).”
Expectations, Learning and Business Cycle Fluctuations (2011, background): “Key contributions include Bullard and Mitra (2002) and Evans and Honkapohja (2003).”
Learning About Monetary Policy Rules When Long-Horizon Expectations Matter (2003, methodology): “…be expectationally stable, giving credence to Friedman’s critique of nominal interest-rate pegs (a form of interest-rate rule).10 This result is related to that of Evans and Honkapohja (2003), who find an analogous result in the context of a model with a more restrictive class of learning dynamics.”
Learning and Equilibrium (2009, background): “A good set of examples of equilibrium selection using learning dynamics can be found in Evans & Honkapohja (2003).”
Monetary policy, learning and the speed of convergence (2007, background): “Next, I consider the case where the central bank has a stabilization objective on inflation and output gap and I focus on the optimal discretionary policy described in Evans and Honkapohja (2003a), EH policy.”