Learning, Inflation Reduction and Optimal Monetary Policy
AbstractIn 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 InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2003-74.
Date of creation: 2003
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Web page: http://center.uvt.nl
inflation; monetary policy; learning; rational expectations; optimal control;
Find related papers by JEL classification:
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
This paper has been announced in the following NEP Reports:
- NEP-COM-2003-08-24 (Industrial Competition)
- NEP-MAC-2003-08-24 (Macroeconomics)
- NEP-MON-2003-08-24 (Monetary Economics)
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.:
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- Bullard, J. & Schaling, E., 2000. "New Economy - New Policy Rules?," Discussion Paper 2000-72, Tilburg University, Center for Economic Research.
- Eric Schaling, 1999. "The non-linear Phillips curve and inflation forecast targeting," Bank of England working papers 98, Bank of England.
- Eric Schaling & Marco Hoeberichts, 2010. "Why Speed Doesnâ€™t Kill: Learning to Believe in Disinflation," Working Papers 164, Economic Research Southern Africa.
- 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.
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