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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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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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References

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  1. Giuseppe Ferrero, 2004. "Monetary Policy and the Transition to Rational Expectations," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 499, Bank of Italy, Economic Research and International Relations Area.
  2. Woodford, M., 1999. "Optimal Monetary Policy Inertia.," Papers, Stockholm - International Economic Studies 666, Stockholm - International Economic Studies.
  3. Berardi, Michele, 2007. "Heterogeneity and misspecifications in learning," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 31(10), pages 3203-3227, October.
  4. Clarida, R. & Gali, J. & Gertler, M., 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and some Theory," Working Papers, C.V. Starr Center for Applied Economics, New York University 98-01, C.V. Starr Center for Applied Economics, New York University.
  5. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2139, C.E.P.R. Discussion Papers.
  6. Bennett T. McCallum, 1998. "Solutions to Linear Rational Expectations Models: A Compact Exposition," NBER Technical Working Papers 0232, National Bureau of Economic Research, Inc.
  7. Bennett T. McCallum, 1981. "On Non-Uniqueness in Rational Expectations Models: An Attempt at Perspective," NBER Working Papers 0684, National Bureau of Economic Research, Inc.
  8. Bennett T. McCallum & Edward Nelson, 1998. "Performance of operational policy rules in an estimated semi-classical structural model," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Mar.
  9. 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.
  10. 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.
  11. Michael Woodford, 2000. "Pitfalls of Forward-Looking Monetary Policy," American Economic Review, American Economic Association, American Economic Association, vol. 90(2), pages 100-104, May.
  12. Krisztina Molnár & Sergio Santoro, 2006. "Optimal Monetary Policy When Agents Are Learning," IEHAS Discussion Papers 0601, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences, revised 15 Mar 2006.
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Cited by:
  1. George W. Evans & Seppo Honkapohja, 2008. "Expectations, Learning, And Monetary Policy: An Overview Of Recent Research," Working Papers Central Bank of Chile, Central Bank of Chile 501, Central Bank of Chile.
  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, Department of Economics, University of Hohenheim, Germany 312/2009, Department of Economics, University of Hohenheim, Germany.
  3. Man-Keung Tang & Xiangrong Yu, 2011. "Communication of Central Bank Thinking and Inflation Dynamics," IMF Working Papers 11/209, International Monetary Fund.
  4. Marzioni, Stefano, 2014. "Signals and learning in a new Keynesian economy," Journal of Macroeconomics, Elsevier, Elsevier, vol. 40(C), pages 114-131.

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