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Learning about monetary policy rules when the cost-channel matters

Luis-Gonzalo Llosa () and Vicente Tuesta ()

Journal of Economic Dynamics and Control, 2009, vol. 33, issue 11, 1880-1896

Abstract: We study how monetary policy may affect determinacy and expectational stability (E-stability) of rational expectations equilibrium when the cost channel of monetary policy matters. Focusing on instrumental Taylor-type rules and optimal target rules, we show that standard policies can induce indeterminacy and expectational instability when the cost channel is present. A naïve application of the traditional Taylor principle could be misleading, and expectations-based reaction function under discretion does not always induce determinate and E-stable equilibrium. This result contrasts with the findings of Bullard and Mitra [2002. Learning about monetary policy rules. Journal of Monetary Economics 49, 1105-1129] and Evans and Honkapohja [2003. Expectations and stability problem for optimal monetary policies. Review of Economic Studies 70, 807-824] for the standard new Keynesian model. The ability of the central bank to commit to an optimal policy is an antidote to these problems.

Keywords: Learning; Monetary; policy; rules; Cost; channel; Indeterminacy (search for similar items in EconPapers)
Date: 2009
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Working Paper: Learning about Monetary Policy Rules when the Cost Channel Matters (2007) Downloads
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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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