Expectations, learning and monetary policy: an overview of recent research

George Evans and Seppo Honkapohja

No 32/2007, Bank of Finland Research Discussion Papers from Bank of Finland

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 for 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 hyperinflation, 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: D84 E31 E52 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (1)

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Related works:
Chapter: Expectations, Learning and Monetary Policy: An Overview of Recent Research (2009)
Working Paper: Expectations, Learning, And Monetary Policy: An Overview Of Recent Research (2008)
Working Paper: Expectations, Learning and Monetary Policy: An Overview of Recent Rersearch (2008)
Working Paper: Expectations, Learning and Monetary Policy: An Overview of Recent Research (2008)
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