Monetary Policy, Indeterminacy and Learning

50 Pages Posted: 19 Dec 2003

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

Bruce McGough

Oregon State University - Department of Economics

Date Written: July 2003

Abstract

The development of tractable forward looking models of monetary policy has lead to an explosion of research on the implications of adopting Taylor-type interest rate rules. Indeterminacies have been found to arise for some specifications of the interest rate rule, raising the possibility of inefficient fluctuations due to the dependence of expectations on extraneous "sunspots." Separately, recent work by a number of authors has shown that sunspot equilibria previously thought to be unstable under private agent learning can in some cases be stable when the observed sunspot has a suitable time series structure. In this paper we generalize the "common factor" technique, used in this analysis, to examine standard monetary models that combine forward looking expectations and predetermined variables. We consider a variety of specifications that incorporate both lagged and expected inflation in the Phillips Curve, and both expected inflation and inertial elements in the policy rule. We find that some policy rules can indeed lead to learnable sunspot solutions and we investigate the conditions under which this phenomenon arises.

Keywords: Monetary Policy, sunspots, expectations, learning, stability

JEL Classification: E52, E32, D83, D84

Suggested Citation

Evans, George W. and McGough, Bruce, Monetary Policy, Indeterminacy and Learning (July 2003). Available at SSRN: https://ssrn.com/abstract=477783 or http://dx.doi.org/10.2139/ssrn.477783

George W. Evans (Contact Author)

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

Bruce McGough

Oregon State University - Department of Economics ( email )

303 Ballard Extension Hall
Corvallis, OR 97331
United States
541-737-2321 (Phone)
541-737-5917 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
62
Abstract Views
982
rank
471,388
PlumX Metrics