Expectations and the Stability Problem for Optimal Monetary Policies

Seppo Honkapohja and George Evans

No 2805, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: A fundamentals-based monetary policy rule, which would be the optimal monetary policy without commitment when private agents have perfectly rational expectations, is unstable if in fact these agents follow standard adaptive learning rules. This problem can be overcome if private expectations are observed and suitably incorporated into the policy maker's optimal rule. These strong results extend to the case in which there is simultaneous learning by the policy maker and the private agents. Our findings show the importance of conditioning policy appropriately, not just on fundamentals, but also directly on observed household and firm expectations.

Keywords: Adaptive learning; Instability; Stability; Private expectations (search for similar items in EconPapers)
JEL-codes: D84 E31 E52 (search for similar items in EconPapers)
Date: 2001-04
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Citations: View citations in EconPapers (22)

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Related works:
Journal Article: Expectations and the Stability Problem for Optimal Monetary Policies (2003)
Working Paper: Expectations and the Stability Problem for Optimal Monetary Policies (2001)
Working Paper: Expectations and the Stability Problem for Optimal Monetary Policies (2000)
Working Paper: Expectations and the stability problem for optimal monetary policies (2000)
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