2006, Optimal monetary policy rules: The problem of stability under heterogeneous learning

In this paper we extend the analysis of optimal monetary policy rules in terms of stability of the economy, started by Evans and Honkapohja (2003b), to the case of heterogeneous learning. Following Giannitsarou (2003), we pose the question about applicability of the representative agent hypothesis to learning. This hypothesis was widely used in learning literature at early stages to demonstrate convergence of an economic system under adaptive learning of agents to one of the rational ex-pectations equilibria in the economy. Studying the validity of this hypothesis in application to monetary policy rules is motivated by relatively recent appearance of general conditions of stability under heterogeneous learning in the literature (see Giannitsarou (2003) and Honkapohja and Mitra (2006)), indications that these con-ditions do not always coincide with stability conditions under homogeneous learning, and the fact that, to our knowledge, optimal monetary policy rules were not studied methodologically for stability of the system under heterogeneous learning. We test these monetary policy rules in the general setup of New Keynesian model that is a working horse of monetary policy models today. It is of interest to see that the results obtained by Evans and Honkapohja (2003b) for homogeneous learning case are replicated for the case when the representative agent hypothesis is lifted