Robust Learning Stability with Operational Monetary Policy Rules

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

CDMA Conference Paper Series from Centre for Dynamic Macroeconomic Analysis

Abstract: We consider “robust stability” of a rational expectations equilibrium, which we define as stability under discounted (constant gain) least-squares learning, for a range of gain parameters. We find that for operational forms of policy rules, i.e. rules that do not depend on contemporaneous values of endogenous aggregate variables, many interest-rate rules do not exhibit robust stability. We consider a variety of interest-rate rules, including instrument rules, optimal reaction functions under discretion or commitment, and rules that approximate optimal policy under commitment. For some reaction functions we allow for an interest-rate stabilization motive in the policy objective. The expectations-based rules proposed in Evans and Honkapohja (2003, 2006) deliver robust learning stability. In contrast, many proposed alternatives become unstable under learning even at small values of the gain parameter.

Keywords: Commitment; interest-rate setting; adaptive learning; stability; determinacy. (search for similar items in EconPapers)
JEL-codes: E52 E31 D84 (search for similar items in EconPapers)
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http://www.st-andrews.ac.uk/economics/CDMA/papers/cp0808.pdf (application/pdf)

Related works:
Working Paper: Robust Learning Stability with Operational Monetary Policy Rules (2008)
Working Paper: Robust learning stability with operational monetary policy rules (2007)
Working Paper: Robust Learning Stability with Operational Monetary Policy Rules (2008)
Working Paper: Robust Learning Stability with Operational Monetary Policy Rules (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:san:cdmacp:0808

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