The dangers of commitment: Monetary policy with adaptive learning

This paper studies a class of interest rate rules, introduced by Evans and Honkapohja (2001a, 2004), that respond to public expectations and to lagged variables. The policymaker commits to the extent that the interest rate responds to lagged output in an effort to influence public expectations. Simulation results show that full commitment, the commitment optimum under rational expectations, is not optimal under adaptive learning for any reasonable parameter values. Copyright Academy of Economics and Finance 2006