Learning about monetary policy rules when the cost-channel matters |
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Authors: | Luis-Gonzalo Llosa Vicente Tuesta |
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Institution: | aEconomics Department, University of California, Los Angeles, CA, USA;bEmerging Markets Research, Deutsche Bank, Lima, Peru;cProfessor at CENTRUM Católica, Pontificia Universidad Católica del Perú, Lima, Peru |
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Abstract: | 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. |
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Keywords: | Learning Monetary policy rules Cost channel Indeterminacy |
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