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Monetary Policy with Heterogeneous and Misspecified Expectations

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  • MICHELE BERARDI

Abstract

In the recent literature on monetary policy and learning, it has been suggested that private sector's expectations should play a role in the policy rule implemented by the central bank, as they could improve the ability of the policymaker to stabilize the economy. Private sector's expectations, in these studies, are often taken to be homogeneous and rational, at least in the limit of a learning process. In this paper, instead, we consider the case in which private agents are heterogeneous in their expectations formation mechanisms and hold heterogeneous expectations in equilibrium. We investigate the impact of this heterogeneity in expectations on central bank's policy implementation and on the ensuing economic outcomes, and the general result that emerges is that the central bank should disregard inaccurate private sector expectations and solely base its policy on the accurate ones. Copyright (c) 2009 The Ohio State University.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 41 (2009)
Issue (Month): 1 (02)
Pages: 79-100

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Handle: RePEc:mcb:jmoncb:v:41:y:2009:i:1:p:79-100

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Honkapohja, Seppo & Evans, George W., 2000. "Expectations and the stability problem for optimal monetary policies," Discussion Paper Series 1: Economic Studies 2000,10, Deutsche Bundesbank, Research Centre.
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  11. Michael Woodford, 1999. "Optimal Monetary Policy Inertia," NBER Working Papers 7261, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. George W. Evans & Seppo Honkapohja, 2008. "Expectations, Learning, And Monetary Policy: An Overview Of Recent Research," Working Papers Central Bank of Chile 501, Central Bank of Chile.
  2. Man-Keung Tang & Xiangrong Yu, 2011. "Communication of Central Bank Thinking and Inflation Dynamics," IMF Working Papers 11/209, International Monetary Fund.
  3. Marzioni, Stefano, 2014. "Signals and learning in a new Keynesian economy," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 114-131.
  4. Felix Geiger & Oliver Sauter, 2009. "Deflationary vs. Inflationary Expectations - A New-Keynesian Perspective with Heterogeneous Agents and Monetary Believes," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 312/2009, Department of Economics, University of Hohenheim, Germany.

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