Research Discussion Papers, Bank of Finland
No 29/2002:
Adaptive learning and monetary policy design
George W. Evans and Seppo Honkapohja
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; (follow links to similar papers)
JEL-Codes: D84; E31; E52; (follow links to similar papers)
39 pages, December 4, 2002
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