Gasteiger, Emanuel (2011): Heterogeneous expectations, Taylor rules and the merit of monetary policy inertia.
Download (1MB) | Preview
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:||09 Jan 2017 15:34|
Binder, M., Pesaran, M. H., 1999. Multivariate Rational Expectations Models and Macroeconometric Modeling: A Review and Some New Results. In: Pesaran, M. H., Wickens, M. R. (Eds.), Handbook of Applied Econometrics. Volume I: Macroeconomics. Vol. 1 of Blackwell Handbooks in Economics. Blackwell Publishing, Oxford, UK, pp. 139–187.
Blanchard, O. J., Kahn, C. M., July 1980. The Solution of Linear Difference Models under Rational Expectations. Econometrica 48 (5), 1305–1311.
Branch, W. A., July 2004. The Theory of Rationally Heterogeneous Expectations: Evidence from Survey Data on Inflation Expectations. The Economic Journal 114 (497), 592–621.
Branch, W. A., McGough, B., February 2009. A New Keynesian Model with Heterogeneous Expectations. Journal of Economic Dynamics and Control Forthcoming.
Bullard, J. B., Mitra, K., September 2002. Learning about Monetary Policy Rules. Journal of Monetary Economics 49 (6), 1105–1129.
Bullard, J. B., Mitra, K., August 2007. Determinacy, Learnability, and Monetary Policy Inertia. Journal of Money, Credit and Banking 39 (5), 1177–1212.
Clarida, R. H., Galí, J., Gertler, M., December 1999. The Science of Monetary Policy: A New Keynesian Perspective. Journal of Economic Literature 37 (4), 1661–1707.
Cochrane, J. H., September 2007. Inflation Determination With Taylor Rules: A Critical Review. NBER Working Paper 13409.
Duffy, J., Xiao, W., November 2009. Investment and Monetary Policy: Learning and Determinacy of Equilibrium. Working Paper.
Evans, G. W., Honkapohja, S., 2001. Learning and Expectations in Macroeconomics. Frontiers of Economic Research. Princeton University Press, Princeton, NJ.
Evans, G. W., McGough, B., November 2005. Monetary Policy, Indeterminacy and Learning. Journal of Economic Dynamics and Control 29 (11), 1809–1840.
Galí, J., 2008. Monetary Policy, Inflation, and the Business Cycle. Princeton University Press.
Klein, P., September 2000. Using the Generalized Schur Form to Solve a Multivariate Linear Rational Expectations Model. Journal of Economic Dynamics and Control 24 (10), 1405–1423.
McCallum, B. T., December 1999. Issues in the Design of Monetary Policy Rules. In: Taylor, J. B., Woodford, M. (Eds.), Handbook of Macroeconomics. Vol. 1A of Handbooks in Economics. North-Holland, Amsterdam, pp. 1483–1530.
McCallum, B. T., August 2009a. Causality, Structure, and the Uniqueness of Rational Expectations Equilibria. NBER Working Paper 15234.
McCallum, B. T., November 2009b. Inflation Determination with Taylor Rules: Is New Keynesian Analysis Critically Flawed? Journal of Monetary Economics 56 (8), 1101–1108.
Preston, B., September 2005. Learning about Monetary Policy Rules when Long-Horizon Expectations Matter. International Journal of Central Banking 1 (2), 81–126.
Sack, B., 1998. Uncertainty, Learning, and Gradual Monetary Policy. FEDS Discussion Paper 1998-34.
Taylor, J. B., Dezember 1993. Discretion versus Policy Rules in Practice. Carnegie-Rochester Conference Series on Public Policy 39, 195–214.
Taylor, J. B., 1999. A Historical Analysis of Monetary Policy Rules. In: Taylor, J. B. (Ed.), Monetary Policy Rules. Vol. 31 of Studies in Business Cycles. National Bureau of Economic Research, The University of Chicago Press, Chicago.
Woodford, M., July 1999. Optimal Monetary Policy Inertia. NBER Working Paper 7261.
Woodford, M., 2003. Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton University Press.