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Central Bank Learning and Monetary Policy

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Author Info
Mewael F. Tesfaselassie
Abstract

We analyze optimal monetary policy when a central bank has to learn about an unknown coefficient that determines the effect of surprise inflation on aggregate demand. We derive the optimal policy under active learning and compare it to two limiting cases---certainty equivalence policy and cautionary policy, in which learning takes place passively. Our novel result is that the two passive learning policies represent an upper and lower bound for the active learning policy, irrespective of the state of the economy

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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1444.

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Length: 10 pages
Date of creation: Aug 2008
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Handle: RePEc:kie:kieliw:1444

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Related research
Keywords: parameter uncertainty; learning; monetary policy;

Find related papers by JEL classification:
C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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  1. Timothy Cogley & Riccardo Colacito & Thomas J. Sargent, 2007. "Benefits from U.S. Monetary Policy Experimentation in the Days of Samuelson and Solow and Lucas," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 67-99, 02. [Downloadable!] (restricted)
    Other versions:
  2. Lars E.O. Svensson & Noah Williams, 2007. "Bayesian and Adaptive Optimal Policy under Model Uncertainty," CFS Working Paper Series 2007/11, Center for Financial Studies. [Downloadable!]
    Other versions:
  3. Athanasios Orphanides & John Williams, 2004. "Imperfect Knowledge, Inflation Expectations, and Monetary Policy," NBER Chapters, in: The Inflation-Targeting Debate, pages 201-246 National Bureau of Economic Research, Inc. [Downloadable!]
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  4. Wieland, Volker, 2000. "Monetary policy, parameter uncertainty and optimal learning," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 199-228, August. [Downloadable!] (restricted)
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  5. Bomfim, Antulio N & Rudebusch, Glenn D, 2000. "Opportunistic and Deliberate Disinflation under Imperfect Credibility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 707-21, November.
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  6. Timothy Cogley & Thomas Sargent & Riccardo Colacito, 2005. "Benefits from U.S. Monetary Policy Experimentation in the Days of Samuelson," 2005 Meeting Papers 791, Society for Economic Dynamics. [Downloadable!]
  7. Balvers, Ronald J & Cosimano, Thomas F, 1994. "Inflation Variability and Gradualist Monetary Policy," Review of Economic Studies, Blackwell Publishing, vol. 61(4), pages 721-38, October. [Downloadable!] (restricted)
  8. Bertocchi, Graziella & Spagat, Michael, 1993. "Learning, experimentation, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 169-183, August. [Downloadable!] (restricted)
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  9. Schaling, Eric, 2003. "Learning, inflation expectations and optimal monetary policy," Research Discussion Papers 20/2003, Bank of Finland. [Downloadable!]
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  10. 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. [Downloadable!] (restricted)
  11. Mewael F. Tesfaselassie & Eric Schaling, 2008. "Managing Disinflation under Uncertainty," Kiel Working Papers 1429, Kiel Institute for the World Economy. [Downloadable!]
  12. 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. [Downloadable!] (restricted)
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  13. Ellison, Martin, 2006. "The learning cost of interest rate reversals," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1895-1907, November. [Downloadable!] (restricted)
    Other versions:
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This page was last updated on 2009-11-24.

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