Communication, Learning and Optimal Monetary Policy
AbstractThe second part of the thesis deals with interest rate policy under inflation targeting when there is uncertainty in the term structure of interest rates emanating from unobserved, possibly volatile, market sentiments. In situations where expectations depend on the state of the economy--the rate of inflation and the level of the output gap, the central bank faces uncertainty about the degree of persistence in aggregate demand and inflation. Interestingly, the speed of learning about the degree of persistence depends on the interest rate policy followed and the resulting variability in inflation and the output gap, where higher variability speeds up learning and improves control of inflation in the long run. The analysis shows that passive and active learning scenarios have different implications for the degree of response of the rate of interest to the state of the economy and thus for the short-run conduct of monetary policy.
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Bibliographic InfoPaper provided by Tilburg University in its series Open Access publications from Tilburg University with number urn:nbn:nl:ui:12-173210.
Date of creation: 2005
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