Discussion Paper Details

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Title: Adaptive Learning and Monetary Policy Design

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

Publication Date: July 2003

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

Programme Area(s): International Macroeconomics

Abstract: We review the recent work on interest rate setting, which emphasizes the desirability of designing policy to ensure stability under 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 discuss 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.

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Bibliographic Reference

Evans, G and Honkapohja, S. 2003. 'Adaptive Learning and Monetary Policy Design'. London, Centre for Economic Policy Research.