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Expectations and the Stability Problem for Optimal Monetary Policies

George Evans () and Seppo Honkapohja ()

University of Oregon Economics Department Working Papers from University of Oregon Economics Department

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 suitable 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.

JEL-codes: E52 C62 D83 D84 C62 (search for similar items in EconPapers)
Date: 2001-08-03, Revised 2001-08-03
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Related works:
Journal Article: Expectations and the Stability Problem for Optimal Monetary Policies (2003) Downloads
Working Paper: Expectations and the Stability Problem for Optimal Monetary Policies (2001) Downloads
Working Paper: Expectations and the Stability Problem for Optimal Monetary Policies (2000)
Working Paper: Expectations and the stability problem for optimal monetary policies (2000) Downloads
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