Monetary Policy, Expectations and Commitment

Evans, George W.; Honkapohja, Seppo

doi:10.2139/ssrn.315567

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Monetary Policy, Expectations and Commitment

49 Pages Posted: 11 Sep 2002

See all articles by George W. Evans

George W. Evans

University of Oregon - Department of Economics; University of St. Andrews - School of Economics and Finance

Seppo Honkapohja

Centre for Economic Policy Research (CEPR); Aalto University School of Business; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Aalto University - School of Business

There are 3 versions of this paper

Date Written: May 28, 2002

Abstract

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

Evans, George W. and Honkapohja, Seppo and Honkapohja, Seppo, Monetary Policy, Expectations and Commitment (May 28, 2002). Available at SSRN: https://ssrn.com/abstract=315567 or http://dx.doi.org/10.2139/ssrn.315567