Learning about Monetary Policy Rules when the Cost Channel Matters

Luis-Gonzalo Llosa and Vicente Tuesta

No 2007-014, Working Papers from Banco Central de Reserva del Perú

Abstract: We study how the stability of rational expectations equilibrium may be affected by monetary policy when agents learn using adaptive learning (E-stability concept) and the cost channel of monetary policy matters. We focus on both instrumental taylor-type rules and optimal rules. We show, analytically, that standard instrument rules -contemporaneous and forecast based rules - can easily induce indeterminacy and expectational instability when the cost channel is present. Overall, a naive application of the Taylor principle in this setting could be misleading. Regarding optimal rules, we find that "expectational-based" rules, under discretion and commitment, do not always induce determinate and E-stable equilibrium. This result stands in contrast to the findings of Evans and Honkapohja (2003) for for the baseline “New Keynessian" model.

Keywords: Monetary Policy Rules; Cost Channel; Indeterminacy (search for similar items in EconPapers)
JEL-codes: C23 O40 O47 (search for similar items in EconPapers)
Date: 2007-08
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (8)

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Journal Article: Learning about monetary policy rules when the cost-channel matters (2009)
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