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Expectations, Learning and Monetary Policy: An Overview of Recent Research

George Evans () and Seppo Honkapohja ()

No 200802, CDMA Working Paper Series from Centre for Dynamic Macroeconomic Analysis

Abstract: Expectations about the future are central for determination of current macroeconomic outcomes and the formulation of monetary policy. Recent literature has explored ways for supplementing the benchmark of rational expectations with explicit models of expectations formation that rely on econometric learning. Some apparently natural policy rules turn out to imply expectational instability of private agents?learning. We use the standard New Keynesian model to illustrate this problem and survey the key results about interest-rate rules that deliver both uniqueness and stability of equilibrium under econometric learning. We then consider some practical concerns such as measurement errors in private expectations, observability of variables and learning of structural parameters required for policy. We also discuss some recent applications including policy design under perpetual learning, estimated models with learning, recurrent hyperinflations, and macroeconomic policy to combat liquidity traps and deflation.

Keywords: Imperfect knowledge; learning; interest-rate setting; fluctuations; stability; determinacy. (search for similar items in EconPapers)
JEL-codes: E52 E31 D84 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2008-01-15
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Related works:
Chapter: Expectations, Learning and Monetary Policy: An Overview of Recent Research (2009) Downloads
Working Paper: Expectations, Learning, And Monetary Policy: An Overview Of Recent Research (2008) Downloads
Working Paper: Expectations, Learning and Monetary Policy: An Overview of Recent Rersearch (2008) Downloads
Working Paper: Expectations, Learning and Monetary Policy: An Overview of Recent Research (2008) Downloads
Working Paper: Expectations, learning and monetary policy: an overview of recent research (2007) Downloads
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