This paper identifies two channels through which the economy can generate endogenous inflation and output volatility, an empirical regularity, by introducing model uncertainty into a Lucas-type monetary model. The equilibrium path of inflation depends on agents' expectations and a vector of...

This paper identifies two channels through which the economy can generate endogenous inflation and output volatility, an empirical regularity, by introducing model uncertainty into a Lucas-type monetary model. The equilibrium path of inflation depends on agents' expectations and a vector of...

Under rational expectations and risk neutrality the linear projection of exchange rate change on the forward premium has a unit coefficient. However, empirical estimates of this coefficient are significantly less than one (and often negative). We investigate whether replacing rational...

The development of tractable forward looking models of monetary policy has lead to an explosion of research on the implications of adopting Taylor-type interest rate rules. Indeterminacies have been found to arise for some specifications of the interest rate rule, raising the possibility of...

Full commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies. Different types of reactions functions to implement and instrument rules to approximate full commitment have been proposed in the literature. We assess optimal reaction...

We study how the use of judgement or “add-factors” in macroeconomic forecasting may disturb the set of equilibrium outcomes when agents learn using recursive methods. We isolate conditions under which new phenomena, which we call exuberance equilibria, can exist in standard macroeconomic...

We investigate both the rational explosive inflation paths studied by McCallum (2001) and the classification of fiscal and monetary policies proposed by Leeper (1991) for stability under learning of rational expectations equilibria (REE).Our first result is that the fiscalist REE in the model of...

We review the recent work on interest rate setting, which emphasizes the desirability of designing policy to ensure stability under private agent learning.Appropriately designed expectations based rules can yield optimal rational expectations equilibria that are both determinate and stable under...

Using New Keynesian models, we compare Friedman's k-percent money supply rule to optimal interest rate setting, with respect to determinacy, stability under learning and optimality.We first review the recent literature.Open-loop interest rate rules are subject to indeterminacy and instability...

In this paper we consider inflation and government debt dynamics when monetary policy employs a global interest rate rule and private agents' forecasts using adaptive learning.Because of the zero lower bound on interest rates, active interest rate rules are known to imply the existence of a...