On the Determinacy of Monetary Policy under Exceptional Errors
Chadha, Jagjit S.
Cambridge Working Papers in Economics
Faculty of Economics
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Chadha, J. S., & Corrado, L. (2007). On the Determinacy of Monetary Policy under Exceptional Errors. https://doi.org/10.17863/CAM.5375
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 modification to the standard policy rule that guarantees determinacy in this setting, which involves the policy maker coordinating inflation dynamics by responding to each of past, current and expected inflation. We show that this solution maps directly into Woodford’s (2000) timeless perspective. We trace the responses in an artificial economy and illustrate the extent to which macroeconomic persistence is reduced following the adoption of this rule.
Expectational Errors, Indeterminacy, Monetary Policy Rules
This record's DOI: https://doi.org/10.17863/CAM.5375
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