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This paper addresses the output-price volatility puzzle by studying the interaction of optimal monetary policy and … processing rate. Although a decline of policy activism directly increases output volatility, it indirectly anchors expectations …, which decreases output volatility. If the indirect effect dominates then the usual trade-off between output and price …
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We introduce the E-correspondence principle for stochastic dynamic expectations models as a tool for comparative dynamics analysis. The principle is applicable to equilibria that are stable under least squares and closely related learning rules. With this technique it is possible to study,...
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