Preston, Bruce (2005): Learning about Monetary Policy Rules when Long-Horizon Expectations Matter. Published in: International Journal of Central Banking , Vol. Volume, No. Number 2 (1. September 2005): pp. 81-126.
Download (303Kb) | Preview
This paper considers the implications of an important source of model misspecification for the design of monetary policy rules: the assumed manner of expectations formation. In the model considered here, private agents seek to maximize their objectives subject to standard constraints and the restriction of using an econometric model to make inferences about future uncertainty. Because agents solve a multiperiod decision problem, their actions depend on forecasts of macroeconomic conditions many periods into the future, unlike the analysis of Bullard and Mitra (2002) and Evans and Honkapohja (2002). A Taylor rule ensures convergence to the rational expectations equilibrium associated with this policy if the so-called Taylor principle is satisfied. This suggests the Taylor rule to be desirable from the point of view of eliminating instability due to self-fulfilling expectations.
|Item Type:||MPRA Paper|
|Original Title:||Learning about Monetary Policy Rules when Long-Horizon Expectations Matter|
|Subjects:||G - Financial Economics > G0 - General > G00 - General
G - Financial Economics > G0 - General
|Depositing User:||Terry Woodard|
|Date Deposited:||21. Nov 2006|
|Last Modified:||15. Feb 2013 03:22|
Bernanke, Ben S., and Michael Woodford. 1997. “Inflation Forecasts and Monetary Policy.” Journal of Money, Credit, and Banking 29 (4): 653–86.
Blanchard, Olivier J., and Charles Kahn. 1980. “The Solution of Linear Difference Models Under Rational Expectations.” Econometrica 48:1305–11.
Bullard, James, and Kaushik Mitra. 2000. “Determinacy, Learnability and Monetary Policy Inertia.”Working Paper No. 2000-030B,Federal Reserve Bank of St. Louis 2002. “Learning About Monetary Policy Rules.” Journal of Monetary Economics 49 (6): 1105–29.
Clarida, Richard, Jordi Gal´ı, and Mark Gertler. 1998. “Monetary Policy Rules in Practice: Some International Evidence.” European Economic Review 42:1033–67. 1999. “The Science of Monetary Policy: A New Keynesian Perspective.” Journal of Economic Literature 37:1661–1707 2000. “Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory.” Quarterly Journal of Economics 115:147–80.
Evans, George W., and Seppo Honkapohja. 2001. Learning and Expectations in acroeconomics. Princeton, NJ: Princeton University Press. 2002. “Monetary Policy, Expectations and Commitment.” Working Paper. 2003. “Expectations and the Stability Problem for Optimal Monetary Policies.” Review of Economic Studies 70(4).
Friedman, Milton. 1968. “The Role of Monetary Policy.” American Economic Review 58 (1): 1–17.
Giannoni, Marc P., and Michael Woodford. 2002a. “Optimal Interest-Rate Rules: I. General Theory.” Unpublished, Columbia University.2002b. “Optimal Interest-Rate Rules: II. expecations.” Unpublished,Columbia University.
Honkapohja, Seppo, and Kaushik Mitra. 2004. “Are Non-Fundamental Equilibria Learnable in Models of Monetary Policy?” Journal of Monetary Economics 58 (8): 1743–70. 2005. “Performance of Monetary Policy with Internal Central Bank Forecasting.” Journal of Economic Dynamics and Control 29 (4): 627–58.
Honkapohja, Seppo, Kaushik Mitra, and George W. Evans. 2002. “Notes on Agents’ Behavioral Rules Under Adaptive Learning and Recent Studies of Monetary Policy.” Unpublished Working Paper.
Howitt, Peter. 1992. “Interest Rate Control and Nonconvergence to Rational Expectations.” Journal of Political Economy 100 (4):776–800.
Marcet, Albert, and Thomas J. Sargent. 1989. “Convergence of Least-Squares Learning in Environments with Hidden State Variables and Private Information.” Journal of Political Economy,1306–22.
McCallum, Bennett T. 1983. “On Non-uniqueness in Rational Expectations Models: An Attempt at Perspective.” Journal of Monetary Economics 11:139–68. 1999. “Issues in the Design of Monetary Policy Rules.” In Handbook of Macroeconomics, Vol. 1C, ed. John B. Taylor and Michael Woodford. Amsterdam: North-Holland.
Preston, Bruce. 2002. “Interaction of Monetary and Fiscal Policy Rules under Adaptive Learning.” Unpublished, Princeton University. 2004. “Adaptive Learning and the Use of Forecasts in Monetary Policy.” Unpublished, Columbia University. Forthcoming. “Adaptive Learning, Forecast-Based Instrument Rules and Monetary Policy.” Journal of Monetary Economics.
Sargent, Thomas J. 1993. Bounded Rationality in Macroeconomics. Oxford University Press.
Sargent, Thomas J., and NeilWallace. 1975. “Rational Expectations, the Optimal Monetary Instrument, and the Optimal Monetary Supply Rule.” Journal of Political Economy 83:241–54.
Svensson, Lars E.O., and Michael Woodford. 2002. “Implementing Optimal Monetary Policy Through Inflation-Forecast Targeting.” Unpublished Manuscript, Princeton University.
Taylor, John. 1993. “Discretion Versus Policy Rules in Practice.” Carnegie-Rochester Conference Series on Public Policy 39:195–214. 1999. “A Historical Analysis of Monetary Policy Rules.” In Monetary Policy Rules, ed. John Taylor. Chicago: University of Chicago Press.
Woodford, Michael. 1999. “Optimal Monetary Policy Inertia.” NBER Working Paper No. 7261. 2003. Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press.