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Monetary policy, expectations and commitment

George Evans () and Seppo Honkapohja ()

No 124, Working Paper Series from European Central Bank

Abstract: Full commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies. Different types of reactions functions to implement and instrument rules to approximate full commitment have been proposed in the literature. We assess 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. The reaction function that appropriately depends explicitly on private expectations performs best on both counts. JEL Classification: E52, E31, D84

Keywords: adaptive learning; commitment; determinacy; interest rate setting; stability (search for similar items in EconPapers)
Date: 2002-02
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Related works:
Journal Article: Monetary Policy, Expectations and Commitment* (2006) Downloads
Working Paper: Monetary Policy, Expectations and Commitment (2005) Downloads
Working Paper: Monetary Policy, Expectations and Commitment (2004) Downloads
Working Paper: Monetary Policy, Expectations and Commitment (2002) Downloads
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