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Title: Monetary Policy, Expectations and Commitment

Author(s): George W. Evans and Seppo Honkapohja

Publication Date: June 2002

Keyword(s): adaptive learning, commitment, interest rate setting and stability determinacy

Programme Area(s): International Macroeconomics

Abstract: Commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies. A number of interest rate reaction functions and instrument rules have been proposed to implement or approximate commitment policy. We assess these optimal reaction functions and instrument rules in terms of whether they lead to an RE equilibrium that is both locally determinate and stable under adaptive learning by private agents. A reaction function that appropriately depends explicitly on private expectations performs well on both counts.

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Bibliographic Reference

Evans, G and Honkapohja, S. 2002. 'Monetary Policy, Expectations and Commitment'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3434