Learning about Monetary Policy Rules when Long-Horizon Expectations Matter

Bruce Preston

MPRA Paper from University Library of Munich, Germany

Abstract: This paper considers the implications of an important source of model misspecification for the design of monetary policy rules: the assumed manner of expectations formation. In the model considered here, private agents seek to maximize their objectives subject to standard constraints and the restriction of using an econometric model to make inferences about future uncertainty. Because agents solve a multiperiod decision problem, their actions depend on forecasts of macroeconomic conditions many periods into the future, unlike the analysis of Bullard and Mitra (2002) and Evans and Honkapohja (2002). A Taylor rule ensures convergence to the rational expectations equilibrium associated with this policy if the so-called Taylor principle is satisfied. This suggests the Taylor rule to be desirable from the point of view of eliminating instability due to self-fulfilling expectations.

JEL-codes: G0 G00 (search for similar items in EconPapers)
Date: 2005-11-28
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (244)

Published in International Journal of Central Banking Number 2.Volume(2005): pp. 81-126

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Related works:
Journal Article: Learning about Monetary Policy Rules when Long-Horizon Expectations Matter (2005)
Working Paper: Learning about monetary policy rules when long-horizon expectations matter (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:830

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