Stabilizing Powers of Monetary Policy under Rational Expectations
نویسندگان
چکیده
The potential of monetary policy to stabilize fluctuations in output and employment is demonstrated in a stochastic rational expectations model in which firms choose, considering average profitability, to set prices in advance of the period when they apply to goods sold. This lead time in pricing decisions increases the fluctuations of output about the normal employment level. But proper use of a feedback monetary policy rule can reduce these fluctuations even though expectations are rational and people know the policy rule. I t is noted that use of a rule-dictated policy sometimes requires the monetary authorities to penalize the economy in the short run for the sake of beneficial system effects of the rule upon the relevant steady-state distributions.
منابع مشابه
Inflation Scares and Forecast-Based Monetary Policy
Central banks pay close attention to inflation expectations. In standard models, however, inflation expectations are tied down by the assumption of rational expectations and should be of little independent interest to policy makers. In this paper, we relax the assumption of rational expectations with perfect knowledge and reexamine the role of inflation expectations in the economy and in the co...
متن کاملRobust Discretionary Monetary Policy under Cost-Push Shock Uncertainty of Iran’s Economy
T here is always uncertainty about the soundness of an economic model’s structure and parameters. Therefore, central banks normally face with uncertainty about the key economic explanatory relationships. So, policymaker should take into account the uncertainty in formulating monetary policies. The present study is aimed to examine robust optimal monetary policy under uncertainty, by ...
متن کاملLearning, monetary policy rules, and macroeconomic stability
Several papers have documented a regime switch in US monetary policy from ‘passive’ and destabilizing in the pre-1979 period to ‘active’ and stabilizing afterwards. These studies typically work with DSGE models with rational expectations. This paper relaxes the assumption of rational expectations and allows for learning instead. Economic agents form expectations from simple models and update th...
متن کاملAlternative Conditions to Time Inconsistency Equilibrium of an International Monetary Policy
Monetary policy rule is an approach to avoid time inconsistency problem as regarded by new classical economist to choose a time plan for policy making in order to maximize householdsâ well-being. The foundation of time inconsistency problem is not coincidence of expectations as an ex-ante variable, which is expected variable, with actual variable as an ex-post variable. Expectations in Finn K...
متن کاملLearning and the Effectiveness of Central Bank Forward Guidance
The unconventional monetary policy of forward guidance operates through the management of expectations about future paths of interest rates. This paper examines the link between expectations formation and the effectiveness of forward guidance. A standard New Keynesian model is extended to include forward guidance shocks in the monetary policy rule. Agents form expectations about future macroeco...
متن کامل