Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212089 
Year of Publication: 
2007
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 31/2007
Publisher: 
Bank of Finland, Helsinki
Abstract: 
We consider the robust stability of a rational expectations equilibrium, which we define as stability under discounted (constant gain) least-squares learning, for a range of gain parameters. We find that for operational forms of policy rules, ie rules that do not depend on contemporaneous values of endogenous aggregate variables, many interest-rate rules do not exhibit robust stability. We consider a variety of interest-rate rules, including instrument rules, optimal reaction functions under discretion or commitment, and rules that approximate optimal policy under commitment. For some reaction functions we allow for an interest-rate stabilization motive in the policy objective. The expectations-based rules proposed in Evans and Honkapohja (2003, 2006) deliver robust learning stability. In contrast, many proposed alternatives become unstable under learning even at small values of the gain parameter.
Subjects: 
commitment
interest-rate setting
adaptive learning
stability
determinacy
JEL: 
E52
E31
D84
Persistent Identifier of the first edition: 
ISBN: 
978-952-462-411-4
Document Type: 
Working Paper

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