Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212090 
Year of Publication: 
2007
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 32/2007
Publisher: 
Bank of Finland, Helsinki
Abstract: 
Expectations about the future are central for determination of current macroeconomic outcomes and the formulation of monetary policy. Recent literature has explored ways for supplementing the benchmark of rational expectations with explicit models of expectations formation that rely on econometric learning. Some apparently natural policy rules turn out to imply expectational instability of private agents' learning. We use the standard New Keynesian model to illustrate this problem and survey the key results for interest-rate rules that deliver both uniqueness and stability of equilibrium under econometric learning. We then consider some practical concerns such as measurement errors in private expectations, observability of variables and learning of structural parameters required for policy. We also discuss some recent applications, including policy design under perpetual learning, estimated models with learning, recurrent hyperinflation, and macroeconomic policy to combat liquidity traps and deflation.
Subjects: 
imperfect knowledge
learning
interest-rate setting
fluctuations
stability
determinacy
JEL: 
E52
E31
D84
Persistent Identifier of the first edition: 
ISBN: 
978-952-462-413-8
Document Type: 
Working Paper

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