Research Discussion Papers, Bank of Finland
No 31/2007:
Robust learning stability with operational monetary policy rules
George W Evans and Seppo Honkapohja ()
Abstract: We consider the robust stability of a rational
expectations equilibrium, which we define as stability under discounted
(constant gain) least-squares learning, for a range of gain parameters. We
find that for operational forms of policy rules, ie rules that do not
depend on contemporaneous values of endogenous aggregate variables, many
interest-rate rules do not exhibit robust stability. We consider a variety
of interest-rate rules, including instrument rules, optimal reaction
functions under discretion or commitment, and rules that approximate
optimal policy under commitment. For some reaction functions we allow for
an interest-rate stabilization motive in the policy objective. The
expectations-based rules proposed in Evans and Honkapohja (2003, 2006)
deliver robust learning stability. In contrast, many proposed alternatives
become unstable under learning even at small values of the gain
parameter.
Keywords: commitment; interest-rate setting; adaptive learning; stability; determinacy; (follow links to similar papers)
JEL-Codes: D84; E31; E52; (follow links to similar papers)
28 pages, December 13, 2007
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