Adaptive Learning , Forecast-Based Instrument Rules and Monetary Policy

@inproceedings{Preston2006AdaptiveL,
  title={Adaptive Learning , Forecast-Based Instrument Rules and Monetary Policy},
  author={Bruce Preston},
  year={2006}
}
This paper argues that recently popular forecast-based instrument rules for monetary policy may fail to stabilize economic ‡uctuations. In a New Keynesian model of output gap and in‡ation determination in which private agents face multi-period decision problems, but have non-rational expectations and learn over time, if the monetary authority adopts a forecast-based instrument rule and responds to observed private forecasts then this class of policies frequently induce divergent learning… CONTINUE READING
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