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| Author: | Evans, G. W. Honkapohja, S. |
| Title: | Expectations and the stability problem for optimal monetary policies |
| Journal: | Review of Economic Studies
2003 : VOL. 70:4(245), p. 807-824 |
| Index terms: | Monetary policy Optimization Economic theory |
| Language: | eng |
| Abstract: | A fundamentals based monetary policy rule, which would be the optimal monetary policy without commitment when private agents have perfectly rational expectations, is unstable if in fact these agents follow standard adaptive learning rules. This problem can be overcome if private expectations are observed and suitably incorporated into the policy maker's optimal rule. The findings of this study show the importance of conditioning policy appropriately, not just on fundamentals, but also directly on observed household and firm expectations. |
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