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The Dynamics of Learning in Optimal Monetary Policy

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Author Info
Orlando Gomes () (Instituto Politécnico de Lisboa - Escola Superior de Comunicação Social and UNIDE-ERC)
Vivaldo M. Mendes () (ISCTE - Department of Economics and UNIDE-ERC)
Diana A. Mendes () (ISCTE - Department of Quantitative Methods and UNIDE-StatMath)

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Abstract

This paper analyzes the dynamic properties of a standard New Keynesian monetary policy model when private agents expectations are assumed to be formed under a learning mechanism. As pointed out in the literature, learning with decreasing gain estimators tends to lead to convergence to the rational expectations equilibrium; however, under constant gain, persistent learning dynamics prevail and nonlinear dynamics of the state variables may subsist over the long term. By assuming a gain sequence that is asymptotically constant, explicit local and global stability results are presented for two specifications of an optimal monetary policy model. In the first setting, the central bank believes that private agents possess rational expectations; while inthe second, the bank incorporates the learning rule in its optimal decisions. In such a framework we find out interesting long term results, in particular, the presence of endogenous business cycles should bestressed as an expected outcome.

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File URL: http://erc.unide.iscte.pt/wpi/ERCwp2008.pdf
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File Function: First version, 2007
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Publisher Info
Paper provided by ISCTE, UNIDE, Economics Research Centre in its series Working Papers with number ercwp2008.

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Length: 27 pages
Date of creation: Dec 2007
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Handle: RePEc:isc:wpaper:ercwp2008

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Related research
Keywords: Learning; Optimal Monetary Policy; Nonlinear Dynamics; Bifurcations and Chaos.;

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Find related papers by JEL classification:
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis

References listed on IDEAS
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