Gasteiger, Emanuel (2011): Heterogeneous expectations, Taylor rules and the merit of monetary policy inertia.
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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.
|Item Type:||MPRA Paper|
|Original Title:||Heterogeneous expectations, Taylor rules and the merit of monetary policy inertia|
|Keywords:||Monetary Policy; Taylor Rules; Heterogeneous Expectations;|
|Subjects:||D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations ; Speculations
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
|Depositing User:||Emanuel Gasteiger|
|Date Deposited:||20 May 2011 10:22|
|Last Modified:||17 Apr 2016 11:10|
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