On the Determinacy of Monetary Policy under Expectational Errors

Chadha, J.S. and Corrado, L. (2007) On the Determinacy of Monetary Policy under Expectational Errors. Working paper. University of St Andrews, Fife, Scotland

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Abstract

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.

Item Type:	Monograph (Working paper)
Additional information:	Working Paper CDMA06/03
Uncontrolled keywords:	Expectational errors; Interdeterminacy; Monetary policy rules
Subjects:	H Social Sciences > HB Economic Theory
Divisions:	Faculties > Social Sciences > School of Economics
Depositing User:	Suzanne Duffy
Date Deposited:	22 Jul 2008 17:05
Last Modified:	05 Sep 2011 23:38
Resource URI:	http://kar.kent.ac.uk/id/eprint/4629 (The current URI for this page, for reference purposes)

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