Interest rate rules and macroeconomic stability under heterogeneous expectations

Tiziana Assenza, Domenico Massaro, Cars Hommes, Mikhail Anufriev

Risultato della ricerca: Contributo in rivistaArticolo in rivista

56 Citazioni (Scopus)

Abstract

The recent macroeconomic literature stresses the importance of managing heterogeneous expectations in the formulation of monetary policy. We use a simple frictionless dynamic stochastic general equilibrium (DSGE) model to investigate inflation dynamics under alternative interest rate rules when agents have heterogeneous expectations, and update their beliefs based on past performance, as in Brock and Hommes [Econometrica 65(5), 1059–1095 (1997)]. The stabilizing effect of different monetary policies depends on the ecology of forecasting rules (i.e., the composition of the set of predictors), on agents' sensitivity to differences in forecasting performance, and on how aggressively the monetary authority sets the nominal interest rate in response to inflation. In particular, if the monetary authority responds only weakly to inflation, a cumulative process with rising inflation is likely. On the other hand, a Taylor interest rate rule that sets the interest rate more than point for point in response to inflation stabilizes inflation dynamics, but does not always lead the system to converge to the rational expectations equilibrium, as multiple equilibria may persist.
Lingua originaleEnglish
pagine (da-a)1574-1604
Numero di pagine31
RivistaMacroeconomic Dynamics
Volume17
DOI
Stato di pubblicazionePubblicato - 2013

Keywords

  • Cumulative Process
  • Heterogeneous Expectations
  • Monetary Policy
  • Taylor Rule

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