Heterogeneous expectations, Taylor rules and the merit of monetary policy inertia

Emanuel Gasteiger

MPRA Paper from University Library of Munich, Germany

Abstract: We present new results for the performance of Taylor rules in a New Keynesian model with heterogeneous expectations. Agents have either rational or adaptive expectations. We find that depending on the particular rule, expectational heterogeneity can create or increase the set of policies that leads to local explosiveness. This is a new level of destabilization compared to what is known. In addition, we demonstrate that policy inertia is an effective tool to safeguard the economy against local explosiveness. Thus, we provide a rationalization for central banks to adjust interest rates with notable inertia in response to shocks.

Keywords: Monetary Policy; Taylor Rules; Heterogeneous Expectations (search for similar items in EconPapers)
JEL-codes: D84 E52 (search for similar items in EconPapers)
Date: 2011-05-10
New Economics Papers: this item is included in nep-cba and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:31004

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