Monetary Policy, Expectations and Commitment

Seppo Honkapohja and George Evans

No 3434, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies. A number of interest rate reaction functions and instrument rules have been proposed to implement or approximate commitment policy. We assess these optimal reaction functions and instrument rules in terms of whether they lead to an RE equilibrium that is both locally determinate and stable under adaptive learning by private agents. A reaction function that appropriately depends explicitly on private expectations performs well on both counts.

Keywords: Commitment; Interest rate setting; Adaptive learning; Stability determinacy (search for similar items in EconPapers)
JEL-codes: D84 E31 E52 (search for similar items in EconPapers)
Date: 2002-06
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (22)

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Related works:
Journal Article: Monetary Policy, Expectations and Commitment* (2006)
Working Paper: Monetary Policy, Expectations and Commitment (2005)
Working Paper: Monetary Policy, Expectations and Commitment (2004)
Working Paper: Monetary policy, expectations and commitment (2002)
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