Expectations and the Stability Problem for Optimal Monetary Policies
Seppo Honkapohja and
George Evans
No 2805, CEPR Discussion Papers from C.E.P.R. Discussion Papers
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
References: Add references at CitEc
Citations: View citations in EconPapers (21)
Downloads: (external link)
https://cepr.org/publications/DP2805 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
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) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:2805
Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP2805
Access Statistics for this paper
More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().