Adaptive Learning and Monetary Policy Design

Bank of Finland Working Paper No. 29/2002

39 Pages Posted: 28 Apr 2003

See all articles by Seppo Honkapohja

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

George W. Evans

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

Multiple version iconThere are 2 versions of this paper

Date Written: December 4, 2002

Abstract

We review the recent work on interest rate setting, which emphasizes the desirability of designing policy to ensure stability under private agent learning. Appropriately designed expectations based rules can yield optimal rational expectations equilibria that are both determinate and stable under learning. Some simple instrument rules and approximate targeting rules also have these desirable properties. We take up various complications in implementing optimal policy, including the observability of key variables and the required knowledge of structural parameters. An additional issue that we take up concerns the implications of expectation shocks not arising from transitional learning effects.

Keywords: Commitment, interest rate setting, adaptive learning, stability, determinacy, expectations shocks

JEL Classification: E52, E31, D84

Suggested Citation

Honkapohja, Seppo and Honkapohja, Seppo and Evans, George W., Adaptive Learning and Monetary Policy Design (December 4, 2002). Bank of Finland Working Paper No. 29/2002, Available at SSRN: https://ssrn.com/abstract=377680 or http://dx.doi.org/10.2139/ssrn.377680

Seppo Honkapohja (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Aalto University School of Business ( email )

, PO Box 21210
Aalto FI-00076
Finland

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Aalto University - School of Business

Finland

George W. Evans

University of Oregon - Department of Economics ( email )

1285 University of Oregon
Eugene, OR 97403
United States
541-346-4662 (Phone)
541-346-1243 (Fax)

University of St. Andrews - School of Economics and Finance ( email )

The Scores, Castlecliff
St. Andrews, Fife KY16 8RD
United Kingdom
44-1334-462435 (Phone)

HOME PAGE: http://www.st-andrews.ac.uk/economics/staff/pages.g.evans.shtml

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