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Monetary Policy with Heterogeneous and Misspecified Expectations

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Author Info
MICHELE BERARDI

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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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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1538-4616.2008.00188.x
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Publisher 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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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Woodford, Michael, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(0), pages 1-35, Supplemen. [Downloadable!] (restricted)
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  2. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December. [Downloadable!] (restricted)
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  3. Seppo Honkapohja & Kaushik Mitra, 2006. "Learning Stability in Economies with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 284-309, April. [Downloadable!] (restricted)
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  4. Giuseppe Ferrero, 2004. "Monetary Policy and the Transition to Rational Expectations," Temi di discussione (Economic working papers) 499, Bank of Italy, Economic Research Department. [Downloadable!]
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  5. Evans, George W & Honkapohja, Seppo, 2002. "Monetary Policy, Expectations and Commitment," CEPR Discussion Papers 3434, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Uhlig, H., 1995. "A toolkit for analyzing nonlinear dynamic stochastic models easily," Discussion Paper 97, Tilburg University, Center for Economic Research. [Downloadable!]
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  7. Berardi, Michele, 2007. "Heterogeneity and misspecifications in learning," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3203-3227, October. [Downloadable!] (restricted)
  8. McCallum, Bennett T., 1998. "Solutions to linear rational expectations models: a compact exposition," Economics Letters, Elsevier, vol. 61(2), pages 143-147, November. [Downloadable!] (restricted)
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  9. Michael Woodford, 2000. "Pitfalls of Forward-Looking Monetary Policy," American Economic Review, American Economic Association, vol. 90(2), pages 100-104, May. [Downloadable!] (restricted)
  10. Bennett T. McCallum, 1983. "On Non-Uniqueness in Rational Expectations Models: An Attempt at Perspective," NBER Working Papers 0684, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Krisztina Molnár & Sergio Santoro, 2006. "Optimal Monetary Policy When Agents Are Learning," IEHAS Discussion Papers 0601, Institute of Economics, Hungarian Academy of Sciences, revised 15 Mar 2006. [Downloadable!]
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  12. George W. Evans & Seppo Honkapohja, 2003. "Expectations and the Stability Problem for Optimal Monetary Policies," Review of Economic Studies, Blackwell Publishing, vol. 70(4), pages 807-824, October. [Downloadable!] (restricted)
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  13. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
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  14. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July. [Downloadable!] (restricted)
  15. William Branch & Bruce McGough, 2004. "Multiple Equilibria in Heterogeneous Expectations Models," The B.E. Journal of Macroeconomics, Berkeley Electronic Press, vol. 0(1). [Downloadable!]
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Cited by:
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  1. 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. [Downloadable!]
  2. 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. [Downloadable!]
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