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Expectations, Learning, and Discretionary Policymaking

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  • Christian Jensen

    (Southern Methodist University)

Abstract

When policy forecasts are based on the policymaker's present and past actions, current policy affects expectations of future policy, contrary to what happens when forecasters can replicate policymaking perfectly. We show that when forecasts are generated through any linear combination of present and past policy functions that produces expectations consistent with the implemented policy, the optimal discretionary policy exploiting learning converges toward the optimal commitment plan as we approach a situation where people do not discount the future. Since influencing expectations permits improving policy, successful policymakers need to know how policy expectations are formed and how they can affect these expectations.

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Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 2 (2006)
Issue (Month): 4 (December)
Pages:

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Handle: RePEc:ijc:ijcjou:y:2006:q:4:a:5

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Cited by:
  1. Gomes, Orlando, 2006. "Monetary policy and economic growth: combining short and long run macro analysis," MPRA Paper 2849, University Library of Munich, Germany.
  2. Gomes, Orlando, 2006. "Nonlinear inflation expectations and endogenous fluctuations," MPRA Paper 2842, University Library of Munich, Germany.
  3. Jensen, Christian, 2014. "Discretionary policy exploiting learning in a sticky-information model of the inflation-output trade-off: Bridging the gap to commitment," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 150-158.

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