Expectations and the Stability Problem for Optimal Monetary Policies

Seppo Honkapohja and George Evans

University of Helsinki, Department of Economics from Department of Economics

Abstract: A fundamentals based monetary policy rule, which would be optimal 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, not just on fundamentals, but also directly on observed household and firm expectations.

Keywords: MONETARY POLICY; POLICY MAKING; HOUSEHOLD (search for similar items in EconPapers)
JEL-codes: D84 E58 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2000
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Citations: View citations in EconPapers (6)

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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 (2001)
Working Paper: Expectations and the stability problem for optimal monetary policies (2000)
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