This work was in part carried out when Honkapohja visited the European Central Bank's Directorate General Research as part of their Research Visitor Programme. Their hospitality and support are gratefully acknowledged. We thank, without implicating, Marco Bassetto, V. V. Chari, Charles Goodhart, Nobu Kiyotaki, Ed Nelson, Evi Pappa, Danny Quah, Lars E. O. Svensson, Mike Woodford and the ECB staff for useful comments. Financial support from the US National Science Foundation Grant No. 0136848 and from grants by the Academy of Finland, Bank of Finland, Yrjö Jahnsson Foundation and Nokia Group is gratefully acknowledged. The research was to a large extent done while Honkapohja was affiliated with the Research Unit on Economic Structures and Growth, University of Helsinki.
Monetary Policy, Expectations and Commitment*
Article first published online: 8 MAY 2006
The Scandinavian Journal of Economics
Volume 108, Issue 1, pages 15–38, March 2006
How to Cite
Evans, G. W. and Honkapohja, S. (2006), Monetary Policy, Expectations and Commitment. The Scandinavian Journal of Economics, 108: 15–38. doi: 10.1111/j.1467-9442.2006.00437.x
- Issue published online: 8 MAY 2006
- Article first published online: 8 MAY 2006
- First version submitted December 2004; final version received April 2005.
- interest-rate rule;
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.