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Inflation Expectations and Learning about Monetary Policy

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Author Info
Andolfatto, David
Scott Hendry
Kevin Moran

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File URL: http://www.bankofcanada.ca/en/res/wp/2002/wp02-30.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 02-30.

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Length: 45 pages Abstract: Various measures indicate that inflation expectations evolve sluggishly relative to actual inflation. In addition, they often fail conventional tests of unbiasedness. These observations are sometimes interpreted as evidence against rational expectations. The authors embed, within a standard monetary dynamic stochastic general-equilibrium model, an information friction and a learning mechanism regarding the interest-rate-targeting rule that monetary policy authorities follow. The learning mechanism enables optimizing economic agents to distinguish between transitory shocks to the policy rule and occasional shifts in the inflation target of monetary policy authorities. The model's simulated data are consistent with the empirical evidence. When the information friction is activated, simulated inflation expectations fail conventional unbiasedness tests much more frequently than in the complete-information case when this friction is shut down. These results suggest that an important size distortion may occur when conventional tests of unbiasedness are applied to relatively small samples dominated by a few significant shifts in monetary policy and sluggish learning about those shifts.
Date of creation: 2002
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Handle: RePEc:bca:bocawp:02-30

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Keywords: Business fluctuations and cycles; Economic models;

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Find related papers by JEL classification:
E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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Cited by:
(explanations, 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. Steffen Henzel, 2008. "Learning Trend Inflation – Can Signal Extraction Explain Survey Forecasts?," Ifo Working Paper Series Ifo Working Paper No. 55, Ifo Institute for Economic Research at the University of Munich. [Downloadable!]
  2. Eric Schaling, 2004. "Learning, inflation expectations and optimal monetary policy," Macroeconomics 0404035, EconWPA. [Downloadable!]
    Other versions:
  3. David Andolfatto & Scott Hendry & Kevin Moran, 2002. "Labour Markets, Liquidity, and Monetary Policy Regimes," Working Papers 02-32, Bank of Canada. [Downloadable!]
    Other versions:
  4. Frank Schorfheide, 2005. "Learning and Monetary Policy Shifts," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 392-419, April. [Downloadable!] (restricted)
    Other versions:
  5. Rautureau, Nicolas, 2004. "Measuring the long-term perception of monetary policy and the term structure," Research Discussion Papers 12/2004, Bank of Finland. [Downloadable!]
  6. Richhild Moessner, . "Optimal discretionary policy in rational expectations models with regime switching," Bank of England working papers 299, Bank of England. [Downloadable!]
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    Other versions:
  8. Maarten Dossche & Gerdie Everaert, 2005. "Measuring inflation persistence: A structural time series approach," Money Macro and Finance (MMF) Research Group Conference 2005 85, Money Macro and Finance Research Group. [Downloadable!]
    Other versions:
  9. Orlando Gomes & Vivaldo M. Mendes & Diana A. Mendes, 2007. "The Dynamics of Learning in Optimal Monetary Policy," Working Papers ercwp2008, ISCTE, UNIDE, Economics Research Centre. [Downloadable!]
  10. Schaling, E., 2003. "Learning, inflation reduction and optimal monetary policy," Discussion Paper 74, Tilburg University, Center for Economic Research. [Downloadable!]
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