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Monetary policy with heterogeneous and misspecified expectations

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  • Michele Berardi

Abstract

In recent literature on monetary policy and learning, it has been suggested that private sector’s expectations should play a role in the policy rule implemented by the central bank, as they could improve the ability of the policymaker to stabilize the economy. Private sector’s expectations, in these studies, are often taken to be homogeneous and rational, at least in the limit of a learning process. In this paper, instead, we consider the case in which private agents are heterogeneous in their expectations formation mechanisms and hold heterogeneous expectations in equilibrium. We investigates the impact of this heterogeneity in expectations on central bank’s policy implementation and on the ensuing economic outcomes.

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Bibliographic Info

Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 81.

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Length: 27 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:man:cgbcrp:81

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  1. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
  2. Seppo Honkapohja & Kaushik Mitra, 2006. "Learning Stability in Economies with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 284-309, April.
  3. Krisztina Molnár & Sergio Santoro, 2010. "Optimal Monetary Policy When Agents Are Learning," Working Paper 2010/08, Norges Bank.
  4. Giuseppe Ferrero, 2004. "Monetary Policy and the Transition to Rational Expectations," Temi di discussione (Economic working papers) 499, Bank of Italy, Economic Research and International Relations Area.
  5. 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.
  6. Evans, George W & Honkapohja, Seppo, 2002. "Monetary Policy, Expectations and Commitment," CEPR Discussion Papers 3434, C.E.P.R. Discussion Papers.
  7. McCallum, Bennett T., 1998. "Solutions to linear rational expectations models: a compact exposition," Economics Letters, Elsevier, vol. 61(2), pages 143-147, November.
  8. Michael Woodford, 2000. "Pitfalls of Forward-Looking Monetary Policy," American Economic Review, American Economic Association, vol. 90(2), pages 100-104, May.
  9. 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.
  10. George W. Evans & Seppo Honkapohja, 2003. "Expectations and the Stability Problem for Optimal Monetary Policies," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 807-824.
  11. Woodford, M., 1999. "Optimal Monetary Policy Inertia.," Papers 666, Stockholm - International Economic Studies.
  12. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  13. Berardi, Michele & Duffy, John, 2007. "The value of central bank transparency when agents are learning," European Journal of Political Economy, Elsevier, vol. 23(1), pages 9-29, March.
  14. William Branch & Bruce McGough, 2004. "Multiple Equilibria in Heterogeneous Expectations Models," The B.E. Journal of Macroeconomics, De Gruyter, vol. 0(1), pages 12.
  15. Harald Uhlig, 1995. "A toolkit for analyzing nonlinear dynamic stochastic models easily," Discussion Paper / Institute for Empirical Macroeconomics 101, Federal Reserve Bank of Minneapolis.
  16. Berardi, Michele, 2007. "Heterogeneity and misspecifications in learning," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3203-3227, October.
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Cited by:
  1. Man-Keung Tang & Xiangrong Yu, 2011. "Communication of Central Bank Thinking and Inflation Dynamics," IMF Working Papers 11/209, International Monetary Fund.
  2. Felix Geiger & Oliver Sauter, 2009. "Deflationary vs. Inflationary Expectations - A New-Keynesian Perspective with Heterogeneous Agents and Monetary Believes," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 312/2009, Department of Economics, University of Hohenheim, Germany.
  3. George Evans & Seppo Honkapohja, 2008. " Expectations, Learning and Monetary Policy: An Overview of Recent Research," CDMA Working Paper Series 0802, Centre for Dynamic Macroeconomic Analysis.

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