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At the zero lower bound (ZLB), expectations about the future path of monetary or fiscal policy are crucial. We model expectations formation under level‐k$k$ thinking, a form of bounded rationality formalized by García‐Schmidt and Woodford (2019) and Farhi and Werning (2019), consistent with experimental evidence. This process does not lead to a number of puzzling features from rational expectations models, such as the reversal puzzle, or implausible large fiscal multipliers. Optimal monetary policy at the ZLB under level‐k$k$ thinking prescribes keeping the nominal rate lower for longer, but short‐run macro‐economic stabilization is less powerful compared to rational expectations. [ABSTRACT FROM AUTHOR]

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The article reports on rational expectations equilibria and discusses the paper, "Adaptive Learning and Monetary Policy Design" by George W. Evans and Seppo Honkapohja. Evans and Honkapohja examine frontier issues in learning analysis of the design of monetary policy rules and develop a linear and microfounded new Keynesian model. The author feels that their model is a benchmark for the analysis of learning behavior. He looks at optimal policy rules in association with Taylor rules and the stability of rational expectations equilibria under learning.

We review the recent work on interest rate setting, which emphasizes the desirability of designing policy to ensure stability under learning. Appropriately designed expectations-based rules can yield optimal rational expectations (REs) equilibria that are both determinate and stable under learning. Some simple instrument rules and approximate targeting rules also have these desirable properties. We discuss various complications in implementing optimal policy, including the observability of key variables and the required knowledge of structural parameters. An additional issue that we take up concerns the implications of expectation shocks not arising from transitional learning effects. [ABSTRACT FROM AUTHOR]

Nominal GDP targeting has been advocated by a number of authors since it produces relative stability of inflation and output. However, all of the papers assume rational expectations on the part of private agents. In this paper I provide an analysis of this assumption. I use stability under recursive learning as a criterion for evaluating nominal GDP targeting in the context of a model with explicit micro-foundations which is currently the workhorse for the analysis of monetary policy. [ABSTRACT FROM AUTHOR]

The article presents commentary from Kirill A. Sossounov about a paper written by Roger Farmer entitled "Money in a Real Business Cycle Model," which was published in the November, 1997 edition of the "Journal of Money, Credit, and Banking." In that paper Farmer detailed a general equilibrium rational expectations macroeconomic model for describing business cycles. The author of the current paper maintains that Farmer's work contains several mathematical errors. He offers corrections and discusses their implications.

The article discusses how competitive deposit rates influence how well or poorly the U.S. Federal Reserve is able to make accurate predictions about the federal funds market. Using rational expectations equilibrium (REE), the article explores how changes in banking requirements impact decision making and the federal funds rate. The article concludes that changes in the marginal costs of deposits results in bigger errors in forecasts of the federal fund rates when the deposit rate is competitive.

The article examines the benefits of contingent tax rules for optimal taxation of a monetary economy. A mathematical model is presented that assumes that the economy is comprised of the government, which does not have any debt, companies, and households. In the model the government sets current and future taxation rates, which directly influences growth rates. The function also assumes that the labor market is in equilibrium and also considers the money market equilibrium and goods market equilibrium in its calculation of expected inflation. The article concludes that the use of open-loop taxation is time-inconsistent in that it allows the government to impose an inflation tax at will.

The article presents research extensions into previous work outlining theories of unexpected money supply change impacts on real variables through the rational expectations model. A review of the preceding studies is given, citing limitations needing to be addressed. Particular attention is given regarding possible endogeneity within the money supply. Elements used in this study include the utilization of the base money supply for aggregate data, a sample period between 1920-1983, and the use of unemployment as a real variable to measure against.

The article focuses on real balances in an ad hoc Keynesian model and policy ineffectiveness. Particular attention is given to a macro model of the type that Sargent and Wallace investigated. The model is assumed to have rational expectations. Provided is the stochastic structure of the disturbance term. In the conclusion section of this article the solution for real balances is provided. The author states that policy cannot change the mean level of output and that policy is unable to change current unanticipated shocks.

This article presents a note on the paper "Optimal Combination Monetary Policies: A Two-Stage Process." The authors present a model to reexamine an issue with this paper. Their findings suggest that a two-stage form of monetary policy is optimal. They examine the impact that adjustments to the bond rate has on the real sector. They note that their model is only relevant in cases that where there is a class of financial market shocks without direct impact on the real sector. They also provide information on neutralizing these shocks.

This article presents a discussion of interest rate volatility and monetary policy. The author investigates whether changes made to the operating procedures of the U.S. Federal Reserve in regard to their monthly changes in the federal funds rate has impacted the structure of relationships within the financial sector. The author presents a rational expectations model to examine if this change in policy has led to changes in the money demand equation. This change may have influenced the rise in interest rate volatility.

The article discusses combination monetary policies to stabilize price and output under rational expectations. The article discusses several previous studies on optimal monetary policy under rational expectations including ones by Thomas Sargent and Neil Wallace. The authors' results suggest that there is a potential role for monetary stabilization policy in a model assuming rational expectations. The article also discusses financial sector disturbances. Several equations and figures are provided to help illustrate the author's study.

The article focuses on short-run responses of interest rates to monetary announcements and the rationality of money supply expectations. It states that anticipated changes are embedded in rates in efficient markets, resulting in only surprise changes being relevant. It mentions that rational expectations would have the System's technique of operation in implementing monetary policy reflected by the effect on interest rates of the surprise component. It states that if a particular variable's subjective expectation is equal to its corresponding mathematical expectation, then the expectation could be considered rational.

The article presents comments on the sluggish price adjustments and the effectiveness of monetary policy under the rational expectations model. The papers "'Rational Expectations,' the Optimal Monetary Instrument, and the Optimal Money Supply Rule," by Neil Wallace and Thomas J. Sargent, and "Some International Evidence on Output-Inflation Tradeoffs," by Robert E. Lucas are referenced. The Lucas-Sargent Proposition (LSP) is identified as proof that output behaves according to the supply function offered by Lucas in models where prices are assumed to adjust to clear markets each period, rendering systematic monetary policies ineffective. The assumption of perfect price flexibility is believed to be vital to the LSP's validity.

The article focuses on the concepts of rational expectations in financial markets. Information on the inconsistency of episodes on rational expectations on statistical technique is presented. Problems associated with empirical tests of the rational expectations hypothesis are discussed. The author feels that, should the U.S. Federal Reserve reduce monetary growth, an economic slump would result that would do little to curb the inflation rate. The rational expectations proposition, which holds that most prices in the economy will conform to the public's expectations of demand and supply, contradicts the interpretation of prices as immediately unresponsive to changes in demand.

The article looks at the economy in Germany from 1960-1972, particularly how the nominal interest rate in an open economy is determined using a credit market economic model and a reduced form solution to calculate interest. This model expands on the Brunner-Meltzer monetary process theory that was devised by Karl Brunner and Allan H. Meltzer. The article concludes that the expected inflation rate and the interest rate are both smaller in the short run, which was confirmed using reduced-form estimates of proxies that were based upon rational or adaptive expectations.

This note updates Mishkin's empirical work through 1984, confirming his original findings and demonstrating that using period-average interest rates does not produce Makin's result. I also show that lagged money surprises have a significant positive impact on rates, a possibility that Mishkin did not investigate. The next section briefly reviews the efficient markets methodology used in Mishkin, comparing it to the specification found in Makin. Then regressions updating Mishkin's results and incorporating Makin's dependent variable are presented. The paper concludes with an attempt to account for the difference in the two paper's results.
Mishkin's result of a significant positive correlation of unexpected money growth and interest rate surprises is found to still hold after adding the years 1977 through 1984 to the sample. The result "passes" several Chow tests, indicating a degree of temporal stability, and is shown not to depend on whether the interest rate is measured at the end of the quarter or as a period average as Makin claimed. I conjecture that Makin's result is due to an inappropriate restriction in his specification and offer some brief evidence suggesting that this is the case. [ABSTRACT FROM AUTHOR]

This paper is an application of efficient markets-rational expectations theory to analyze empirically the relationship of money supply growth and short-term interest rates, a hotly debated issue in the literature. This approach has the advantage over earlier research on this subject in that it imposes a theoretical structure that allows easier interpretation of the empirical results as well as more powerful statistical tests. The empirical results uniformly do not support the proposition that increases in money growth are correlated with declines in short rates. [ABSTRACT FROM AUTHOR]

In this paper I discuss three aspects of the experience of the LDCs since the advent of the new exchange rate regime. These aspects are the short-term variabilities of (1) exchange rates, (2) real exchange rates, and (3) reserve use. The results are interesting only in that they confirm expectations based on conventional theory. [ABSTRACT FROM AUTHOR]

The existence of humpbacked bond yield curves has been well documented. Yet theoretical explanations of this phenomenon have been deficient. The pure expectations hypothesis can explain humpbacked curves to be the result of a series of rising and then falling forward rates. But this explanation suffers from the drawbacks of the expectations hypothesis that have been pointed out in the literature. This paper offers a new explanation of humpbacked curves that builds upon the work of Malkiel [3]. It will be shown below that humpbacked curves may occur if the distributions of interest rates expected to prevail one period hence are skewed. [ABSTRACT FROM AUTHOR]

In the past, exchange rate expectations have been modelled by economists either as a mechanistic distributed lag function of past exchange rates or as some form of "rational" expectations. In this paper we take a middle ground, specifying exchange rate expectations as a function of real economic variables that are endogenous to a fully specified Kouri-Porter type model of capital flows. We estimate both the capital flow equation and an expectations function for the fixed and floating Canadian dollar and for selected short run periods. The estimated expectations function, as expected a priori, is then shown to be at least a partial explanation for the observed instabilities of the capital flow equation. [ABSTRACT FROM AUTHOR]

In this paper, I have developed simple tests of whether the sources of exchange rate change are monetary or non-monetary. And whether, if monetary, the major source of variability is changes in expectations. The basis for the empirical tests is a simple monetary model of exchange rate determination that predicts positive correlations of spot and forward exchange rate movements; positive correlations between both the spot and the forward exchange rates on the one hand, and interest differential on the other; and greater variability of spot than forward exchange rates when altered expectations about the future course of monetary variables are the major source of variability. All but the last test is satisfied by the data from nine different currencies quoted daily from the beginning of 1974. This suggests that monetary explanations, based on changes in the expectations about the future course of monetary variables, can contribute to an understanding of recent experience but must be supplemented by non-monetary considerations before that understanding is complete. [ABSTRACT FROM AUTHOR]

Subsequent to the October 1979 shift in monetary policy in the United States, interest rates in North America not only reached unprecedented levels but also exhibited unprecedented volatility. Using Canadian data, the authors show that anticipated quarterly changes in long-term rates associated with the rational-expectations model have remained small during this post-shift period. The authors examine three sets of recorded forecasts of long-term interest rates in Canada and note their failure to improve upon the no-change prediction. The "perverse" relationship between the slope of the yield curve and the subsequent movement in long-term rates exists in the Canadian data but is of only modest value in a forecasting context. The excess returns on long- term bonds implicit in the recorded forecasts of the level of interest rates vary sharply, yet there is little evidence that forecasters have identified a predictable component of time-varying term premia. [ABSTRACT FROM AUTHOR]

The article presents information on tests that focused on the behavior of the term structure of interest rates. The first test centered around the "expectations hypothesis," which states that forward rates of interest are forced into equality with the short rates that investors expect to prevail in subsequent periods. The second hypothesis discussed is that investors' expectations are equivalent with optimal forecasts of statistical theory for a certain specified class of statistical models. It is the aim of the article to demonstrate that if the assumption of covariance stationarity is retained, a wide variety of empirical work on the term structure can be interpreted as testing Samuelson's model.

The article focuses on indeterminate fate of sunspots in economics and the history of macroeconomics. Topics discussed include schools of thought dominating macroeconomics including rational expectations and Keynesian econometrics, statistical relationship between inflation and real output and possibility that active monetary policy was efficient. It mentions standard overlapping generation models and allowed for welfare-improving public intervention.

Monetary uncertainty may cause the demand for money to increase or the velocity of money to fall. This is the so-called Friedman's hypothesis. This hypothesis has received mixed empirical support in the literature, thereby necessitating further examination. An important issue in the literature is that the existing studies have mainly focused on developed economies when testing Friedman's hypothesis. The few studies focusing on developing countries have mainly tested the stability of the demand for money function. However, how monetary uncertainty determines the behaviour of the demand for money function is equally important. In this paper, we tested Friedman's hypothesis by focusing on a developing country, thereby adding to the existing literature. Using a technique which allows us to differentiate short-run impact from long-run impact, we examined the impact of monetary uncertainty on the money demand in Ghana during the period 1990Q1 to 2016Q3. In addition, we assessed the stability of the demand for money function in this country. We found that monetary uncertainty has a negative and significant impact on the demand for money in both the short and the long run. This finding refutes Friedman's hypothesis. The implication of this finding is that the public prefers to hold safer assets to cash money during periods of monetary uncertainty in Ghana. Finally, we found evidence in support of a stable demand for money function in Ghana. One implication of the stable demand for money function in the country is that monetary policy aimed at smoothing the growth rates of monetary aggregates could enhance the stability of the economy by ruling out monetary policy as a source of uncertainty. The other is that, because a stable demand for money function implies the demand for money changes in a predictable fashion, the central bank may be able to achieve the objectives of the inflation-targeting framework that it is currently practising. [ABSTRACT FROM AUTHOR]

This paper is based on cognitive psychology’s view of “curvilinear” optimism–pessimism and hence, contains a flavor of behavioral macroeconomics. The substructure of a real overlapping-generations business cycle model is assumed to be underlined by the long-term character of firms’ rational expectations. This model is combined with the workers’ “bell-shaped” optimism–pessimism about a fractional-reserve-banking economy. An exogenous shock will be propagated through this workers’ psychology. Policy-wise, the public sector is ignored and the only purpose of the monetary authority is to secure the efficiency of intergenerational income distribution in a business environment with zero full-employment general-equilibrium profit. Within this context, monetary policy is found to be in the spirit of the Old Chicago quantity theory in that monetary expansion is anti-recessionary, and the increase of the reserve ratio is shown to be anti-inflationary. It is a viewpoint with Chartalist flavor. [ABSTRACT FROM AUTHOR]

We analyze the implications of openness and growth for determinacy and learnability of rational expectations equilibria in a two-country New Keynesian model with alternative monetary policy rules. Under the contemporaneous data rule, the conditions for determinacy and learnability become more stringent as a result of openness but less stringent as a result of growth, so that growth weakens the effect of openness. Under the expectations-based rule, the conditions for determinacy and learnability also become more stringent as a result of openness, whereas as a result of trend growth the conditions for determinacy also become more stringent (thus reinforcing the effect of openness) but those for learnability become less stringent (thus weakening the effect of openness). As in related studies, the elasticity of intertemporal substitution is key to our result, but within a framework that is consistent with long-run labor supply and balanced growth facts. [ABSTRACT FROM PUBLISHER]

Both papers in this session try to discriminate between various theories of the determination of exchange rates. The null hypothesis of the Brittain paper is that monetary factors are not relevant in the determination of exchange rates. After examining some of the implications of current monetary models he rejects the null hypothesis. The Sargen paper sets out to explain the empirical observation that in the floating exchange rate period some rates were highly volatile while others seemed to be quite stable. He examines the implications of two alternative theories. He finds that the Purchasing Power Parity (PPP) theory as extended by Girton & Roper is not quite adequate in explaining exchange rate fluctuations, but that it explains reserve changes quite well. The Aliber-Dornbusch-McKinnon approach, which is the alternative theory, implies that structural parameters of the economy will influence exchange rate volatility. He then proceeds to estimate these parameters and finds that they are not sufficiently different across countries to account for the differences in exchange rate volatility. [ABSTRACT FROM AUTHOR]

This article develops a dependent economy model that focuses on the interactions between inflation and asset price dynamics under a flexible exchange rate and rational expectation. We assume that money wage adjusts instantaneously to clear the labour market. The asset prices are represented by the Tobin’s q and exchange rate. Using this framework, we will examine implications of monetary policy, fiscal policy, tariff liberalization and exogenous capital flows for inflation and asset prices, which in turn determine the allocation of labour and the sectoral composition of output. The effects of different exogenous and policy-induced shocks critically depend on the difference in the speeds of adjustment in commodity price and asset prices and multiple cross effects generated by changes in these prices. [ABSTRACT FROM AUTHOR]

We study the (lack of) anchoring of inflation expectations in New Zealand using a new survey of firms. Managers of these firms display little anchoring of inflation expectations, despite twenty-five years of inflation targeting by the Reserve Bank of New Zealand, a fact which we document along a number of dimensions. Managers are unaware of the identities of central bankers as well as central banks' objectives, and are generally poorly informed about recent inflation dynamics. Their forecasts of future inflation reflect high levels of uncertainty and are extremely dispersed as well as volatile at both short and long-run horizons. Similar results can be found in the U.S. using currently available surveys. [ABSTRACT FROM AUTHOR]

Harry Johnson's 1971 ideas about the factors affecting the success of the Keynesian Revolution and the Monetarist Counter-revolution are summarised and extended to the analysis of the Rational Expectations-New Classical (RE-NC) Revolution. It is then argued that whereas Monetarism brought about a revival of the quantity theory of money from the limbo into which Keynesianism had pushed it, RE-NC modelling was responsible for that theory's most recent disappearance. This happened despite the fact that, initially, RE-NC economics appeared to be a mainly technical extension and refinement of Monetarism, rather than a radically new economic doctrine. Some implications of this story for todays’ macroeconomics are briefly discussed. [ABSTRACT FROM PUBLISHER]

The design and analysis of optimal monetary policy is usually guided by the paradigm of homogeneous rational expectations. Instead, we examine the dynamic consequences of design and implementation strategies, when the actual economy features expectational heterogeneity. Agents have either rational or adaptive expectations. Consequently, the central bank's ability to achieve price stability under heterogeneous expectations depends on its objective and implementation strategy. An expectations-based reaction function, which appropriately conditions on private sector expectations, performs exceptionally well. However, once the objective introduces policy inertia, popular strategies have similar determinacy properties, but they are less operational. This finding calls for new implementation strategies under interest rate stabilization. [ABSTRACT FROM AUTHOR]

Monetary policy actions since 2008 have influenced long-term interest rates through forward guidance and quantitative easing. I propose a strategy to identify the comovement between interest rate and equity price movements induced by monetary policy when an observable representing policy changes is not available. A decline in long-term interest rates induced by monetary policy statements has a larger positive effect on equity prices prior to 2009 than in the subsequent period. This change appears to reflect the impact of the zero lower bound on short-term interest rates. [ABSTRACT FROM AUTHOR]

This paper studies a simple monetary model with a Ricardian fiscal policy in which equilibria are indeterminate if monetary policy consists solely of a rule for fixing the short-term interest rate. We introduce explicitly into the model the agents' expectations of inflation which create the indeterminacy and show that there are two types of policies-a term structure rule or a forward guidance rule for the short rate-which lead to determinacy. The first consists in fixing the interest rates on a family of bonds of different maturities as function of realized inflation; the second consists in fixing the short-term interest rate and the expected values of the short-term interest rate for a sequence of periods into the future as a function of realized inflation. If the monetary authority chooses an inflation process that satisfies conditions derived in the paper and applies one of these rules, it anchors agents' expectations to this process, in the sense that it is the unique inflation process compatible with equilibrium when the interest rates or expected future values of the short rate are those specified by the term structure or forward guidance rule. [ABSTRACT FROM AUTHOR]

An introduction is presented in which the editor discusses various reports within the issue on topics including monetary policy reform, the Keynesian model for monetarist and Keynesian ideas related to interest rate rules, and the effects of central bank transparency on economic uncertainty.

The study tests the policy irrelevance proposition in the inflation targeting monetary policy environment in South Africa, as well as in the context of a dichotomy between anticipated and unanticipated policy shocks. Findings from estimates of monetary policy reaction function confirmed that an open economy implicit Taylor rule characterised the monetary policy instrument in South Africa, providing evidence that suggests that the monetary policy has, indeed, been conducted systematically on the basis of information from past inflation and the output gap. While aggregates of evidence invalidates rational expectations' PIP proposition in South Africa, doubts exists about the capacity of inflation targeting monetary policy in curbing inflationary pressures in the economy. For policy, this study supports calls for supplementing the inflation targeting framework with targets for other real variables, such as output and employment. [ABSTRACT FROM AUTHOR]

Standard solution methods for linear stochastic models with rational expectations presuppose a time-invariant structure. Consequently, credible announcements that entail future changes of the structure cannot be handled by standard solution methods. This paper develops the solution for linear stochastic rational expectations models in the face of a finite sequence of anticipated structural changes. These events encompass anticipated changes to the structural parameters and also anticipated additive shocks. We apply the solution to some examples of practical relevance to monetary policy. [ABSTRACT FROM AUTHOR]

We analyse the effects of social learning in a monetary policy context. Social learning might be viewed as more descriptive of actual learning behaviour in complex market economies. In our model, Taylor Principle governs uniqueness and expectational stability of rational expectations equilibrium (REE) under homogeneous recursive algorithms. We find that the Taylor Principle is not necessary for convergence to REE minimum state variable (MSV) equilibrium under social learning. Sunspot equilibria exist in the indeterminate region. Our agents cannot co-ordinate on a sunspot equilibrium in general form specification, however, they can co-ordinate on common factor specification. We contribute to the use of genetic algorithm learning in stochastic environments. [ABSTRACT FROM AUTHOR]