Hostname: page-component-74656f9884-8r8nv Total loading time: 0 Render date: 2026-11-07T20:13:37.416Z Has data issue: false hasContentIssue false
  • English
  • Français

LEARNING, COMMITMENT, AND MONETARY POLICY

THE CASE FOR PARTIAL COMMITMENT

Published online by Cambridge University Press:  15 September 2009

George A. Waters
George A. Waters*
Affiliation:
Illinois State University
*
Address correspondence to: George A. Waters, Department of Economics, Campus Box 4200, Illinois State University, Normal, IL 61790-4200, USA; e-mail: gawater@ilstu.edu.
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the 'Save PDF' action button.

This paper examines a class of interest rate rules that respond to public expectations and to lagged variables and considers varying levels of commitment that correspond to varying degrees of response to lagged output. Under commitment the policymaker adjusts the nominal rate with lagged output to impact public expectations. Within this class of rules, I provide a condition for nonexplosive and determinate solutions. Expectational stability obtains for any nonnegative response to lagged output. Simulation results show that modified commitment is best under least-squares learning. However, in the presence of parameter uncertainty and/or measurement error in the policymaker's data on public expectations, the best policy is one of partial commitment, where the response to lagged output is less than under modified commitment. The case for partial commitment is strengthened if the gain parameter in the learning mechanism is high, which can be interpreted as the use of few lags by public agents in the formation of expectations or as an indication of low credibility of the policymaker. The appointment of a conservative central banker ameliorates these concerns about modified commitment.

Keywords

LearningMonetary PolicyInterest Rate RulesDeterminacyExpectational Stability

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 13 , Issue 4 , September 2009 , pp. 421 - 449
Copyright
Copyright © Cambridge University Press 2009

References

REFERENCES

Barro, Robert J. and Gordon, David B. (1983) A positive theory of monetary policy in a natural rate model. Journal of Political Economy 91, 589–610.CrossRefGoogle Scholar
Beechey, Meredith (2004) Excess Sensitivity and Volatility of Long Interest Rates: The Role of Limited Information in Bond Markets. Working Paper, University of California Berkeley.Google Scholar
Blake, A.P. (2001) A “Timeless Perspective” on Optimality in Forward-Looking Rational Expectations Models. Working Paper, National Institute for Economic and Social Research.Google Scholar
Blanchard, Oliver and Kahn, Charles (1980) The solution of linear difference models under rational expectations. Econometrica 48 (5), 1305–1311.CrossRefGoogle Scholar
Bray, Margaret (1982) Learning, estimation, and the stability of rational expectations. Journal of Economic Theory 26 (2), 312–339.CrossRefGoogle Scholar
Bullard, James and Cho, In-Koo (2005) Escapist policy rules. Journal of Economic Dynamics and Control, 29 (11), 1841–65.CrossRefGoogle Scholar
Bullard, James and Mitra, Kaushik (2002) Learning about monetary policy rules. Journal of Monetary Economics 49, 1105–1129.CrossRefGoogle Scholar
Carceles-Poveda, Eva and Giannitsarou, Chryssi (in press) Asset pricing with adaptive learning. Review of Economic Dynamics.Google Scholar
Clarida, Richard, Gali, Jordi, and Gertler, Mark (1999) The science of monetary policy: A New Keynesian perspective. Journal of Economic Literature 37, 1661–1707.CrossRefGoogle Scholar
Clarida, Richard, Gali, Jordi, and Gertler, Mark (2000) Monetary policy rules and macroeconomic stability: Evidence and some theory. Quarterly Journal of Economics 115, 147–180.CrossRefGoogle Scholar
Evans, George and Honkapohja, Seppo (1993) Adaptive forecasts, hysteresis and endogenous fluctuations. Federal Reserve Bank of San Francisco Economic Review 1993 (1), 3–13.Google Scholar
Evans, George and Honkapohja, Seppo (2001) Learning and Expectations in Macroeconomics. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Evans, George and Honkapohja, Seppo (2003) Expectations and the stability problem for optimal monetary policies. Review of Economic Studies 70, 807–824.CrossRefGoogle Scholar
Evans, George and Honkapohja, Seppo (2006) Monetary policy, expectations and commitment. Scandinavian Journal of Economics 108, 15–38.CrossRefGoogle Scholar
Evans, George and McGough, Bruce (2005) Monetary policy, indeterminacy and learning. Journal of Economic Dynamics and Control 29, 1809–1840.CrossRefGoogle Scholar
Fuhrer, Jeffrey and Hooker, Mark (1993) Learning about monetary regime shifts in an overlapping wage contract model. Journal of Economic Dynamics and Control 17 (4), 531–53.CrossRefGoogle Scholar
Grandmont, Jean-Michel (1998) Expectations formation and stability of large socioeconomic systems. Econometrica 66, 741–781.CrossRefGoogle Scholar
Honkapohja, Seppo and Mitra, Kaushik (2003) Learning with bounded memory in stochastic models. Journal of Economic Dynamics and Control 27, 1437–1457.CrossRefGoogle Scholar
Honkapohja, Seppo and Mitra, Kaushik (2004) Are non-fundamental equilibria learnable in models of monetary policy? Journal of Monetary Economics 51 (8), 1743–1770.CrossRefGoogle Scholar
Howitt, Peter (1992) Interest rate control and nonconvergence to rational expectations. Journal of Political Economy 100, 776–800.CrossRefGoogle Scholar
Jensen, Christian and McCallum, Bennet (2002) The non-optimality of proposed monetary policy rules under timeless-perspective commitment. Economics Letters, 77 (2), 163–168.CrossRefGoogle Scholar
Kydland, Finn E. and Prescott, Edward C. (1977) Rules rather than discretion: The inconsistency of optimal plans. Journal of Political Economy 85, 473–493.CrossRefGoogle Scholar
Marcet, Albert and Nicolini, Juan (2004) Recurrent hyperinflations and learning. American Economic Review 93 (5), 1476–1498.CrossRefGoogle Scholar
Marcet, A., and Sargent, T. (1989) Convergence of least squares learning mechanisms in self-referential linear stochastic models. Journal of Economic Theory 48, 337–368.CrossRefGoogle Scholar
McCallum, Bennet T. (1983) On non-uniqueness in linear rational expectations models: An attempt at perspective. Journal of Monetary Economics 11, 139–168.CrossRefGoogle Scholar
McCallum, Bennet T. (1997) The role of the minimum state variables criterion in rational expectations models. Journal of International Tax and Finance 6 (4), 621–639.Google Scholar
McCallum, Bennet T. and Nelson, Edward (2004) Timeless perspective vs. discretionary monetary policy in forward looking models. Federal Reserve Bank of St. Louis Review 86 (2), 43–56.Google Scholar
Orphanides, Athanios and Williams, John C. (2002) Imperfect Knowledge, Inflation Expectations and Monetary Policy. Working Paper 9884, National Bureau of Economic Research.CrossRefGoogle Scholar
Orphanides, Athanios and Williams, John C. (2006) Monetary policy with imperfect knowledge. Journal of the European Economic Association 4 (2–3), 366–375.CrossRefGoogle Scholar
Rogoff, Kenneth (1985) The optimal degree of commitment to an intermediate monetary target. Quarterly Journal of Economics 100 (4), 1169–89.CrossRefGoogle Scholar
Walsh, Carl E. (2003) Monetary Theory and Policy. Cambridge, MA: MIT Press.Google Scholar
Waters, George (2006) Dangers of commitment: Monetary policy with adaptive learning. Journal of Economics and Finance 30 (1), 93–104.CrossRefGoogle Scholar
Waters, George (2007) Regime changes, learning and monetary policy. Journal of Macroeconomics 29 (2), 255–282.CrossRefGoogle Scholar
Woodford, Michael (1999a) Commentary: How should monetary policy be conducted in an era of price stability? In New Challenges for Monetary Policy, pp. 277–316. Federal Reserve Bank of Kansas City.Google Scholar
Woodford, Michael (1999b) Optimal monetary policy inertia. The Manchester School, Supplement 67, 1–35.CrossRefGoogle Scholar
Woodford, Michael (2003) Interest and Prices. Princeton, NJ: Princeton University Press.Google Scholar