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Monetary Policy and Learning from the Central Bank's Forecast Author info | Abstract | Publisher info | Download info | Related research | Statistics Ichiro Muto (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: ichirou.mutou@boj.or.jp))
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We examine the expectational stability (E-stability) of the rational expectations equilibrium (REE) in a simple New Keynesian model in which private agents engage in adaptive learning by referring to the central bank's forecast. In this environment, to satisfy the E-stability condition, the central bank must respond more strongly to the expected inflation rate than the so-called Taylor principle suggests. On the other hand, the central bank's strong reaction to the expected inflation rate raises the possibility of indeterminacy of the REE. In considering these problems, a robust policy is to respond to the current inflation rate to a certain degree.
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Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number
08-E-01.
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Date of creation: Jan 2008Date of revision:
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Keywords: Adaptive Learning ; E-stability ; New Keynesian Model ; Monetary Policy ; Taylor principle ; Find related papers by JEL classification: E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
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