Monetary policy; expectations and commitment

George William Evans () and Seppo Mikko Sakari Honkapohja ()

No 124, Working Paper Series from European Central Bank

Abstract: Full commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies. Different types of reactions functions to implement and instrument rules to approximate full commitment have been proposed in the literature. We assess optimal reaction functions and instrument rules, in terms of whether they lead to an RE equilibrium that is both locally determinate and stable under adaptive learning by private agents. The reaction function that appropriately depends explicitly on private expectations performs best on both counts. JEL Classification: E52; E31; D84.

Keywords: Commitment; interest rate setting; adaptive learning; stability; determinacy. (search for similar items in EconPapers)
Date: 2002-02
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Related works:
Working Paper: Monetary Policy, Expectations and Commitment (2002)
Working Paper: Monetary Policy, Expectations and Commitment (2005)
Working Paper: Monetary Policy, Expectations and Commitment (2004)
Journal Article: Monetary Policy, Expectations and Commitment (2006)
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