The Value of Interest Rate Stabilization Policies When Agents Are Learning |
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Authors: | JOHN DUFFY WEI XIAO† |
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Institution: | John Duffy;is Professor of Economics, University of Pittsburgh, 230 S. Bouquet Street, Pittsburgh, PA 15260 (E-mail:) . Wei Xiao;is Assistant Professor of Economics, State University of New York at Binghamton, P.O. Box 6000, Binghamton, NY 13902 (E-mail:). |
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Abstract: | We examine the expectational stability (E-stability) of rational expectations equilibrium in the "New Keynesian" model where monetary policy is optimally derived and interest rate stabilization is added to the central bank's traditional objectives of inflation and output stabilization. We consider both the case where the central bank lacks a commitment technology and the case of full commitment. We show that for both cases, optimal policy rules yield rational expectations equilibria that are E-stable for a wide range of empirically plausible parameter values. These findings stand in contrast to Evans and Honkapohja's findings for optimal monetary policy rules in environments where interest rate stabilization is not a central bank objective. |
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Keywords: | D83 E43 E52 |
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