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Optimal Monetary Policy under Learning in a New Keynesian Model with Cost Channel and Inflation Inertia

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  • Bask, Mikael

    ()
    (Department of Economics)

  • Proaño, Christian R

    (Department of Economics)

Abstract

We show that a so-called expectations-based optimal monetary policy rule has desirable properties in a standard New Keynesian model augmented with a cost channel and inflation rate expectations that are partly backward-looking. In particular, optimal monetary policy under commitment is associated with a determinate rational expectations equilibrium that is stable under least squares learning for all parameter constellations considered, whereas, under discretion in policy-making, the central bank has to be sufficiently inflation rate averse for the rational expectations equilibrium to have the same properties.

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Bibliographic Info

Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2012:7.

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Length: 25 pages
Date of creation: 29 Feb 2012
Date of revision:
Handle: RePEc:hhs:uunewp:2012_007

Contact details of provider:
Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
Email:
Web page: http://www.nek.uu.se/
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Keywords: Commitment; Cost Channel; Determinacy; Discretion; Inflation Inertia; Least Squares Learning; Optimal Monetary Policy;

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References

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  3. Honkapohja, Seppo & Evans, George W., 2000. "Expectations and the stability problem for optimal monetary policies," Discussion Paper Series 1: Economic Studies 2000,10, Deutsche Bundesbank, Research Centre.
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  18. James B. Bullard, 2006. "The learnability criterion and monetary policy," Review, Federal Reserve Bank of St. Louis, issue May, pages 203-217.
  19. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  20. Llosa, Luis-Gonzalo & Tuesta, Vicente, 2009. "Learning about monetary policy rules when the cost-channel matters," Journal of Economic Dynamics and Control, Elsevier, vol. 33(11), pages 1880-1896, November.
  21. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August.
  22. Evans, George W. & McGough, Bruce, 2005. "Monetary policy and stable indeterminacy with inertia," Economics Letters, Elsevier, vol. 87(1), pages 1-7, April.
  23. McCallum, Bennett T., 1983. "On non-uniqueness in rational expectations models : An attempt at perspective," Journal of Monetary Economics, Elsevier, vol. 11(2), pages 139-168.
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