Expectations, Learning And Monetary Policy: An Overview Of Recent Research
Source: Bank of Finland
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 expectation instability of private agents' learning. The authors use the standard New Keynesian model to illustrate this problem and survey the key results for interstate rules that deliver both uniqueness and stability of equilibrium under econometric learning.