Published and unpublished papers by Wei Xiao

Expectations and Optimal Monetary Policy: A Stability Problem Revisited

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Coauthored with Junyi Xu, Economics Letters, 2014, Vol 124, Issue 2.

A landmark result in the optimal monetary policy design literature is that fundamental-based interest rate rules invariably lead to rational expectations equilibria (REE) that are not stable under adaptive learning. In this paper, we make a novel information assumption that private agents cannot observe aggregate fundamental shocks, and use simple linear fore- casting rules for learning. We find that with fundamental-based rules, there exist limited information equilibria that are stable under learning. More- over, there are multiple equilibria. Learning can be used as a selection tool to identify a unique equilibrium.

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Written by wxiao

June 1, 2014 at 10:34 pm

Posted in Published

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