TY - JOUR
T1 - Learning about monetary policy rules when the cost-channel matters
AU - Llosa Velásquez, Luis Gonzalo
AU - Tuesta, Vicente
PY - 2009/11
Y1 - 2009/11
N2 - We study how monetary policy may affect determinacy and expectational stability (E-stability) of rational expectations equilibrium when the cost channel of monetary policy matters. Focusing on instrumental Taylor-type rules and optimal target rules, we show that standard policies can induce indeterminacy and expectational instability when the cost channel is present. A naïve application of the traditional Taylor principle could be misleading, and expectations-based reaction function under discretion does not always induce determinate and E-stable equilibrium. This result contrasts with the findings of Bullard and Mitra [2002. Learning about monetary policy rules. Journal of Monetary Economics 49, 1105–1129] and Evans and Honkapohja [2003. Expectations and stability problem for optimal monetary policies. Review of Economic Studies 70, 807–824] for the standard new Keynesian model. The ability of the central bank to commit to an optimal policy is an antidote to these problems.
AB - We study how monetary policy may affect determinacy and expectational stability (E-stability) of rational expectations equilibrium when the cost channel of monetary policy matters. Focusing on instrumental Taylor-type rules and optimal target rules, we show that standard policies can induce indeterminacy and expectational instability when the cost channel is present. A naïve application of the traditional Taylor principle could be misleading, and expectations-based reaction function under discretion does not always induce determinate and E-stable equilibrium. This result contrasts with the findings of Bullard and Mitra [2002. Learning about monetary policy rules. Journal of Monetary Economics 49, 1105–1129] and Evans and Honkapohja [2003. Expectations and stability problem for optimal monetary policies. Review of Economic Studies 70, 807–824] for the standard new Keynesian model. The ability of the central bank to commit to an optimal policy is an antidote to these problems.
U2 - 10.1016/j.jedc.2009.05.001
DO - 10.1016/j.jedc.2009.05.001
M3 - Article in a journal
SN - 0165-1889
VL - 33
SP - 1880
EP - 1896
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
IS - 11
ER -