On the Determinacy of Monetary Policy under Expectational Errors

Forward looking agents with expectational errors provide a problem

for monetary policy. We show that under such conditions a standard

interest rate rule may not achieve determinacy. We suggest a

modi?cation to the standard policy rule that guarantees determinacy

in this setting, which involves the policy maker co-ordinating in?ation

dynamics by responding to each of past, current and expected in?ation.

We show that this solution maps directly into Woodford?s (2000)

timeless perspective. We trace the responses in an arti?cial economy

and illustrate the extent to which macroeconomic persistence is

reduced following the adoption of this rule.