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Learning about the Term Structure and Optimal Rules for Inflation Targeting

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  • Tesfaselassie, M.F.
  • Schaling, E.
  • Eijffinger, S.C.W.

    (Tilburg University, Center for Economic Research)

Abstract

In this paper we incorporate the term structure of interest rates in a standard inflation forecast targeting framework.We find that under flexible inflation targeting and uncertainty in the degree of persistence in the economy, allowing for active learning possibilities has e®ects on the optimal interest rate rule followed by the central bank.For a wide range of possible initial beliefs about the unknown parameter, the dynamically optimal rule is in general more activist, in the sense of responding aggressively to the state of the economy, than the myopic rule for small to moderate deviations of the state variable from its target.On the other hand, for large deviations, the optimal policy is less activist than the myopic and the certainty equivalence policies.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2006-88.

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Date of creation: 2006
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Handle: RePEc:dgr:kubcen:200688

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

Related research

Keywords: Learning; Rational Expectations; Separation Principle; Term Structure of Interest Rates;

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References

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  1. Ellison, Martin, 2003. "The Learning Cost of Interest Rate Reversals," CEPR Discussion Papers 4135, C.E.P.R. Discussion Papers.
  2. Rudebusch, G. & Svensson, L.E.O., 1999. "Eurosystem Monetary Targeting: Lessons from U.S. Data," Papers 672, Stockholm - International Economic Studies.
  3. Stephen Pollock, 2002. "Recursive Estimation in Econometrics," Working Papers 462, Queen Mary, University of London, School of Economics and Finance.
  4. Yetman, James, 2003. "Probing potential output: Monetary policy, credibility, and optimal learning under uncertainty," Journal of Macroeconomics, Elsevier, vol. 25(3), pages 311-330, September.
  5. James Bullard & Kaushik Mitra, 2002. "Learning about monetary policy rules," Working Papers 2000-001, Federal Reserve Bank of St. Louis.
  6. Eijffinger, S.C.W. & Schaling, E. & Verhagen, W.H., 1998. "The Term Structure of Interest Rates and Inflation Forecast Targeting," Discussion Paper 1998-85, Tilburg University, Center for Economic Research.
  7. Svensson, Lars E.O., 1997. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Seminar Papers 615, Stockholm University, Institute for International Economic Studies.
  8. Ellison, Martin & Valla, Natacha, 2001. "Learning, uncertainty and central bank activism in an economy with strategic interactions," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 153-171, August.
  9. Klok, H.J. & Schaik, A.B.T.M. van & Smulders, J.A., 2001. "Economologues: Liber Amicorum voor Theo van de Klundert," Open Access publications from Tilburg University urn:nbn:nl:ui:12-86472, Tilburg University.
  10. Schaling , Eric & Eijffinger , Sylvester & Tesfaselassie , Mewael, 2004. "Heterogeneous information about the term structure, least-squares learning and optimal rules for inflation targeting," Research Discussion Papers 23/2004, Bank of Finland.
  11. James Bullard & Eric Schaling, 2000. "New economy - new policy rules?," Working Papers 2000-019, Federal Reserve Bank of St. Louis.
  12. Thomas Sargent & Noah Williams & Tao Zha, 2006. "The Conquest of South American Inflation," NBER Working Papers 12606, National Bureau of Economic Research, Inc.
  13. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
  14. Schaling, E., 1998. "The Nonlinear Phillips Curve and Inflation Forecast Targeting - Symmetric Versus Asymmetric Monetary Policy Rules," Discussion Paper 1998-136, Tilburg University, Center for Economic Research.
  15. Bullard, James & Schaling, Eric, 2006. "Monetary policy, determinacy, and learnability in the open economy," Working Paper Series 0611, European Central Bank.
  16. Kiefer, Nicholas M & Nyarko, Yaw, 1989. "Optimal Control of an Unknown Linear Process with Learning," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(3), pages 571-86, August.
  17. Beck, Gunter W. & Wieland, Volker, 2002. "Learning and control in a changing economic environment," Journal of Economic Dynamics and Control, Elsevier, vol. 26(9-10), pages 1359-1377, August.
  18. Pollock, D. S. G., 2003. "Recursive estimation in econometrics," Computational Statistics & Data Analysis, Elsevier, vol. 44(1-2), pages 37-75, October.
  19. Levin, Andrew T. & Moessner, Richhild, 2005. "Inflation persistence and monetary policy design: an overview," Working Paper Series 0539, European Central Bank.
  20. Tesfaselassie, M.F., 2005. "Communication, Learning and Optimal Monetary Policy," Open Access publications from Tilburg University urn:nbn:nl:ui:12-173210, Tilburg University.
  21. 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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Citations

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Cited by:
  1. Lars E.O. Svensson & Noah Williams, 2008. "Optimal Monetary Policy Under Uncertainty in DSGE Models: A Markov Jump-Linear-Quadratic Approach," Working Papers Central Bank of Chile 484, Central Bank of Chile.
  2. Lars E.O. Svensson & Noah Williams, 2008. "Optimal monetary policy under uncertainty: a Markov jump-linear-quadratic approach," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 275-294.
  3. Svensson, Lars E.O., 2010. "Inflation Targeting," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 22, pages 1237-1302 Elsevier.
  4. Mewael F. Tesfaselassie & Eric Schaling, 2008. "Managing Disinflation under Uncertainty," Kiel Working Papers 1429, Kiel Institute for the World Economy.
  5. D.A. Kendrick & H.M. Amman & M.P. Tucci, 2008. "Learning About Learning in Dynamic Economic Models," Working Papers 08-20, Utrecht School of Economics.
  6. Svensson, Lars E. O. & Williams, Noah, 2006. "Bayesian and adaptive optimal policy under model uncertainty," CFS Working Paper Series 2007/11, Center for Financial Studies (CFS).
  7. Williams, Noah, 2012. "Monetary policy under financial uncertainty," Journal of Monetary Economics, Elsevier, vol. 59(5), pages 449-465.
  8. Eric Schaling & Marco Hoeberichts, 2010. "Why Speed Doesn’t Kill: Learning to Believe in Disinflation," De Economist, Springer, vol. 158(1), pages 23-42, April.
  9. repec:nbr:nberwo:13892 is not listed on IDEAS

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