Monetary Policy, Expectations and Commitment
49 Pages Posted: 11 Sep 2002
Date Written: May 28, 2002
Full commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies. Different types of reactions functions to implement and instrument rules to approximate full commitment have been proposed in the literature. We assess optimal reaction functions and instrument rules, in terms of whether they lead to an RE equilibrium that is both locally determinate and stable under adaptive learning by private agents. The reaction function that appropriately depends explicitly on private expectations performs best on both counts.
Keywords: Commitment, Interest Rate Setting, Adaptive Learning, Stability, Determinacy
JEL Classification: E52, E31, D84
Suggested Citation: Suggested Citation