• norsk
    • English
  • English 
    • norsk
    • English
  • Login
View Item 
  •   Home
  • Norges Handelshøyskole
  • Department of Economics
  • Discussion papers (SAM)
  • View Item
  •   Home
  • Norges Handelshøyskole
  • Department of Economics
  • Discussion papers (SAM)
  • View Item
JavaScript is disabled for your browser. Some features of this site may not work without it.

Optimal monetary policy when agents are learning

Molnár, Krisztina; Santoro, Sergio
Working paper
Thumbnail
View/Open
dp2007-7.pdf (578.2Kb)
URI
http://hdl.handle.net/11250/163056
Date
2006-11
Metadata
Show full item record
Collections
  • Discussion papers (SAM) [676]
Abstract
Most studies of optimal monetary policy under learning rely on optimality conditions derived for the case when agents have rational expectations. In this paper, we derive optimal

monetary policy in an economy where the Central Bank knows, and makes active use of, the learning algorithm agents follow in forming their expectations. In this setup, monetary policy can influence future expectations through its effect on learning dynamics, introducing an

additional trade-off between inflation and output gap stabilization. Specifically, the optimal

interest rate rule reacts more aggressively to out of equilibrium inflation expectations and

noisy cost-push shocks than would be optimal under rational expectations: the Central Bank

exploits its ability to "drive" future inflation expectations closer to equilibrium. This optimal

policy qualitatively resembles optimal policy when the Central Bank can commit and agents

have rational expectations. Moreover, when beliefs are updated according to recursive least

squares, the optimal policy is time-varying: after a structural break the Central Bank should

be more aggressive and relax the degree of aggressiveness in subsequent periods. The policy

recommendation is robust: under our policy the welfare loss if the private sector actually has

rational expectations is much smaller than if the Central Bank mistakenly assumes rational expectations whereas in fact agents are learning.
Publisher
Norwegian School of Economics and Business Administration. Department of Economics
Series
Discussion paper
2007:7

Contact Us | Send Feedback

Privacy policy
DSpace software copyright © 2002-2019  DuraSpace

Service from  Unit
 

 

Browse

ArchiveCommunities & CollectionsBy Issue DateAuthorsTitlesSubjectsDocument TypesJournalsThis CollectionBy Issue DateAuthorsTitlesSubjectsDocument TypesJournals

My Account

Login

Statistics

View Usage Statistics

Contact Us | Send Feedback

Privacy policy
DSpace software copyright © 2002-2019  DuraSpace

Service from  Unit