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Learning, Inflation Reduction and Optimal Monetary Policy

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  • Schaling, E.

    (Tilburg University, Center for Economic Research)

Abstract

In this paper we analyze disinflation in two environments.One in which the central bank has perfect knowledge, in the sense that it understands and observes the process by which private sector inflation expectations are generated, and one in which the central bank has to learn the private sector inflation forecasting rule.Here, the learning scheme we investigate is that of least-squares learning (recursive OLS) using the Kalman filter.With imperfect knowledge, results depend on the learning scheme that is employed.A novel feature of the passive learning policy - compared to the central bank s disinflation policy under perfect knowledge - is that the degree of monetary accommodation (the extent to which the central bank accommodates private sector inflation expectations) is no longer constant across the disinflation, but becomes state-dependent.This means that the central bank's behaviour changes during the disinflation as it collects more information.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2003-74.

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Date of creation: 2003
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Handle: RePEc:dgr:kubcen:200374

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Web page: http://center.uvt.nl

Related research

Keywords: inflation; monetary policy; learning; rational expectations; optimal control;

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  1. Eric Schaling, 1999. "The non-linear Phillips curve and inflation forecast targeting," Bank of England working papers 98, Bank of England.
  2. Bullard, J. & Schaling, E., 2000. "New Economy - New Policy Rules?," Discussion Paper 2000-72, Tilburg University, Center for Economic Research.
  3. James B. Bullard, 1991. "Learning, rational expectations and policy: a summary of recent research," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 50-60.
  4. Eric Schaling & Marco Hoeberichts, 2010. "Why Speed Doesn’t Kill: Learning to Believe in Disinflation," Working Papers 164, Economic Research Southern Africa.
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