Robust Taylor Rules In An Open Economy With Heterogeneous Expectations And Least Squares Learning

The aim of this paper is threefold: to investigate if there is a unique Rational Expectations Equilibrium (REE) in the small open economy in Galí and Monacelli (2005) that is augmented with technical trading in the foreign exchange market; to investigate if the unique REE is adaptively learnable in a recursive least squares sense; and to investigate if the unique and adaptively learnable REE is desirable in an inflation rate targeting regime in the sense that a low and not too variable CPI inflation rate in equilibrium is achieved.