Ordinary Least Squares (OLS) estimation of monetary policy rules produces potentially inconsistent estimates of policy parameters. The reason is that central banks react to variables, such as inflation and the output gap, which are endogenous to monetary policy shocks. Endogeneity implies a...

Ordinary Least Squares (OLS) estimation of monetary policy rules produces potentially inconsistent estimates of policy parameters. The reason is that central banks react to variables, such as in ation and the output gap, which are endogenous to monetary policy shocks. Endogeneity implies a...

In this paper, we perform an in - depth investigation of relative merits of two adaptive learning algorithms with constant gain, Recursive Least Squares (RLS) and Stochastic Gradient (SG), using the Phelps model of monetary policy as a testing ground. The behavior of the two learning algorithms...

This study shows that an expectations-based optimal policy rule has desirable properties in a standard macroeconomic model incorporating a cost channel for monetary disturbances and inflation rate expectations that are partly backwardlooking. Specifically, optimal monetary policy under...