IDEAS home Printed from https://ideas.repec.org/p/urs/urswps/13-01.html
   My bibliography  Save this paper

Robust Stability of Monetary Policy Rules under Adaptive Learning

Author

Abstract

Recent research has explored how minor changes in expectation formation can change the stability properties of a model (Duffy and Xiao 2007, Evans and Honkapoja 2009). This paper builds on this research by examining an economy subject to a variety of monetary policy rules under an endogenous learning algorithm proposed by Marcet and Nicolini (2003). The results indicate that operational versions of optimal discretionary rules are not "robustly stable" as in Evans and Honkapoja (2009). In addition commitment rules are not robust to minor changes in expectational structure and parameter values.

Suggested Citation

  • Eric Gaus, 2012. "Robust Stability of Monetary Policy Rules under Adaptive Learning," Working Papers 13-01, Ursinus College, Department of Economics, revised 14 Dec 2012.
  • Handle: RePEc:urs:urswps:13-01
    as

    Download full text from publisher

    File URL: http://webpages.ursinus.edu/egaus/Research/GausPolicyInstability.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Adam, Klaus & Billi, Roberto M., 2006. "Optimal Monetary Policy under Commitment with a Zero Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1877-1905, October.
    2. Guido Ascari & Tiziano Ropele, 2009. "Trend Inflation, Taylor Principle, and Indeterminacy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(8), pages 1557-1584, December.
    3. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 147-180.
    4. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
    5. George W. Evans & Seppo Honkapohja, 2006. "Monetary Policy, Expectations and Commitment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(1), pages 15-38, March.
    6. George W. Evans & Seppo Honkapohja, 2003. "Adaptive learning and monetary policy design," Proceedings, Federal Reserve Bank of Cleveland, pages 1045-1084.
    7. Jensen, Christian & McCallum, Bennett T., 2002. "The non-optimality of proposed monetary policy rules under timeless perspective commitment," Economics Letters, Elsevier, vol. 77(2), pages 163-168, October.
    8. John Duffy & Wei Xiao, 2007. "The Value of Interest Rate Stabilization Policies When Agents Are Learning," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(8), pages 2041-2056, December.
    9. George W. Evans & Seppo Honkapohja, 2009. "Robust Learning Stability with Operational Monetary Policy Rules," Central Banking, Analysis, and Economic Policies Book Series, in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 5, pages 145-170, Central Bank of Chile.
    10. Milani, Fabio, 2014. "Learning and time-varying macroeconomic volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 47(C), pages 94-114.
    11. McCallum, Bennett T., 1999. "Issues in the design of monetary policy rules," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 23, pages 1483-1530, Elsevier.
    12. Klein, Paul, 2000. "Using the generalized Schur form to solve a multivariate linear rational expectations model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1405-1423, September.
    13. Milani, Fabio, 2007. "Expectations, learning and macroeconomic persistence," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2065-2082, October.
    14. Howitt, Peter, 1992. "Interest Rate Control and Nonconvergence to Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 776-800, August.
    15. Branch, William A. & Evans, George W., 2006. "A simple recursive forecasting model," Economics Letters, Elsevier, vol. 91(2), pages 158-166, May.
    16. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Eric Gaus, 2013. "Time-Varying Parameters and Endogenous Learning Algorithms," Working Papers 13-02, Ursinus College, Department of Economics.
    2. Eric Gaus & Srikanth Ramamurthy, 2012. "Learning and Loss Functions: Comparing Optimal and Operational Monetary Policy Rules," Working Papers 14-01, Ursinus College, Department of Economics, revised 14 Dec 2013.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Eric Gaus, 2013. "Robust Stability of Monetary Policy Rules under Adaptive Learning," Southern Economic Journal, John Wiley & Sons, vol. 80(2), pages 439-453, October.
    2. George W. Evans & Seppo Honkapohja, 2009. "Expectations, Learning and Monetary Policy: An Overview of Recent Research," Central Banking, Analysis, and Economic Policies Book Series, in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 2, pages 027-076, Central Bank of Chile.
    3. George W. Evans & Seppo Honkapohja, 2009. "Robust Learning Stability with Operational Monetary Policy Rules," Central Banking, Analysis, and Economic Policies Book Series, in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 5, pages 145-170, Central Bank of Chile.
    4. George W. Evans & Seppo Honkapohja, 2009. "Expectations, Learning and Monetary Policy: An Overview of Recent Research," Central Banking, Analysis, and Economic Policies Book Series, in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 2, pages 027-076, Central Bank of Chile.
    5. repec:zbw:bofrdp:2007_032 is not listed on IDEAS
    6. George W. Evans & Seppo Honkapohja, 2009. "Robust Learning Stability with Operational Monetary Policy Rules," Central Banking, Analysis, and Economic Policies Book Series, in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 5, pages 145-170, Central Bank of Chile.
    7. George W. Evans & Seppo Honkapohja, 2009. "Robust Learning Stability with Operational Monetary Policy Rules," Central Banking, Analysis, and Economic Policies Book Series, in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 5, pages 145-170, Central Bank of Chile.
    8. Molnár, Krisztina & Santoro, Sergio, 2014. "Optimal monetary policy when agents are learning," European Economic Review, Elsevier, vol. 66(C), pages 39-62.
    9. repec:zbw:bofrdp:2007_031 is not listed on IDEAS
    10. Gasteiger, Emanuel, 2021. "Optimal constrained interest-rate rules under heterogeneous expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 190(C), pages 287-325.
    11. GEORGE W. EVANS & BRUCE McGOUGH, 2007. "Optimal Constrained Interest-Rate Rules," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(6), pages 1335-1356, September.
    12. Evans, George W. & McGough, Bruce, 2005. "Monetary policy, indeterminacy and learning," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 1809-1840, November.
    13. Stefano Eusepi & Bruce Preston, 2008. "Stabilizing expectations under monetary and fiscal policy coordination," Staff Reports 343, Federal Reserve Bank of New York.
    14. Yu‐chin Chen & Pisut Kulthanavit, 2008. "Adaptive Learning And Monetary Policy In An Open Economy: Lessons From Japan," Pacific Economic Review, Wiley Blackwell, vol. 13(4), pages 405-430, October.
    15. Guido Ascari & Argia M. Sbordone, 2014. "The Macroeconomics of Trend Inflation," Journal of Economic Literature, American Economic Association, vol. 52(3), pages 679-739, September.
    16. Yu-chin Chen & Pisut Kulthanavit, 2008. "Adaptive Learning and Monetary Policy: Lessons from Japan," Working Papers UWEC-2008-12-P, University of Washington, Department of Economics, revised Oct 2008.
    17. Bennett T. McCallum & Edward Nelson, 2004. "Timeless perspective vs. discretionary monetary policy in forward-looking models," Review, Federal Reserve Bank of St. Louis, vol. 86(Mar), pages 43-56.
    18. Berardi, Michele & Duffy, John, 2007. "The value of central bank transparency when agents are learning," European Journal of Political Economy, Elsevier, vol. 23(1), pages 9-29, March.
    19. Bask, Mikael & Proaño, Christian R., 2016. "Optimal monetary policy under learning and structural uncertainty in a New Keynesian model with a cost channel and inflation inertia," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 112-126.
    20. James Bullard & Kaushik Mitra, 2007. "Determinacy, Learnability, and Monetary Policy Inertia," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(5), pages 1177-1212, August.
    21. George W. Evans & Seppo Honkapohja, 2003. "Adaptive learning and monetary policy design," Proceedings, Federal Reserve Bank of Cleveland, pages 1045-1084.
    22. George W. Evans & Seppo Honkapohja, 2006. "Monetary Policy, Expectations and Commitment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(1), pages 15-38, March.

    More about this item

    Keywords

    Learning; Rational Expectations; Monetary Policy Rules;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:urs:urswps:13-01. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Eric Gaus (email available below). General contact details of provider: https://edirc.repec.org/data/ebursus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.