Published and unpublished papers by Wei Xiao

The Value of Interest Rate Stabilization Polices When Agents are Learning

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Jointly with John Duffy, Journal of Money, Credit, and Banking (2007) vol. 39, pp. 2041-2056.(Download)

We examine expectational stability (E—stability) of rational expectations equilibrium under optimal interest rate rules in the context of the standard, “New Keynesian” model of the monetary transmission mechanism. We focus on the case where the monetary authority adds interest rate stabilization to its traditional objectives of inflation and output stabilization. We consider both the case where the monetary authority lacks a commitment technology and the case of full commitment. We show that for both cases, optimal interest rate rules yield rational expectations equilibria that are E-stable for a wide range of empirically plausible parameter values. This finding stands in contrast to the findings of Evans and Honkapohja (2002, 2003ab) for optimal monetary policy rules in environments where interest rate stabilization is not part of the central bank’s ob jective function. 


Written by wxiao

January 21, 2009 at 7:38 pm

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