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A general theory of controllability and expectations anchoring for small-open economies

Andrew Hughes Hallett (), Giovanni Di Bartolomeo () and Nicola Acocella

Journal of International Money and Finance, 2012, vol. 31, issue 2, 397-411

Abstract: Rational expectations are often used as an argument against policy activism, as they may undermine or neutralize the policymaker’s actions. Although this sometimes happens, rational expectations do not always imply policy invariance or ineffectiveness. In fact, in certain circumstances rational expectations can enhance our power to control an economy over time. In those cases, policy announcements can be used to extend the impact of conventional policy instruments. We present a general forward-looking policy framework and use it to provide a formal rationale for testing when policymakers can and cannot expect to be able to manage expectations. To describe the relevance of our results applications are shown for policy design in small-open economies. Those are the cases where domestic policies are at their weakest and our ability to influence expectations most constrained.

Keywords: Rational expectations; Controllability; Policy neutrality; Monetary policy; Trade policy; Imperfect pass-through (search for similar items in EconPapers)
JEL-codes: C61 C62 E52 E61 E62 (search for similar items in EconPapers)
Date: 2012
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