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Keywords:

  • Commitment;
  • interest-rate rule;
  • learning;
  • stability;
  • determinacy
  • E52;
  • E31;
  • D84

Abstract

Commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies. A number of interest-rate reaction functions and instrument rules have been proposed to implement or approximate commitment policy. We assess these rules in terms of whether they lead to a rational expectations equilibrium that is both locally determinate and stable under adaptive learning by private agents. A reaction function that appropriately depends explicitly on private sector expectations performs particularly well on both counts.