Learning, inflation reduction and optimal monetary policy

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Learning, inflation reduction and optimal monetary policy

Author Info

Schaling, E. (Tilburg University, Center for Economic Research)

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Eric Schaling

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

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

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Find related papers by JEL classification:
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
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)

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Other versions:
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