Adaptive learning and the use of forecasts in monetary policy

Bruce James Preston

Research output: Contribution to journalArticleResearchpeer-review

20 Citations (Scopus)

Abstract

This paper investigates monetary policy design when central bank and private-sector expectations differ. Private agents learn adaptively; the central bank has a possibly misspecified model of the economy. Successful implementation of optimal policy using inflation targeting rules requires the central bank to have complete knowledge of private agents learning behavior. If the central bank mistakenly assumes private agents to have rational expectations when in fact they are learning, then policy rules frequently lead to divergent learning dynamics. However, if the central bank does not correctly understand agents behavior, stabilization policy is best implemented by controlling the path of the price level rather than the inflation rate.
Original languageEnglish
Pages (from-to)3661 - 3681
Number of pages21
JournalJournal of Economic Dynamics and Control
Volume32
Issue number11
DOIs
Publication statusPublished - 2008
Externally publishedYes

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