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Learning process and rational expectations: an analysis using a small macroeconomic model for New Zealand

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    Abstract

    The nature of expectations matters when conducting monetary policy. Models with a learning process can exhibit very different properties from models with other types of expectations rules. This paper draws on the work of Orphanides and Williams (2002), extending it to allow for the possibility that the learning process may not be perpetual, but rather might be converging towards a rational expectations equilibrium. By modelling expectations using a learning process, we obtain evidence suggesting that inflation expectations in New Zealand are moving towards rational expectations. Theory suggests this will make it easier to control inflation after a temporary disturbance.

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    File URL: http://www.rbnz.govt.nz/research_and_publications/discussion_papers/2003/dp03_05.pdf
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    Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2003/05.

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    Length: 23p
    Date of creation: May 2003
    Date of revision:
    Handle: RePEc:nzb:nzbdps:2003/05

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    Cited by:
    1. Gernot Pehnelt, 2007. "Globalisation and Inflation in OECD Countries," Jena Economic Research Papers 2007-055, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
    2. Özer Karagedikli & Rishab Sethi & Christie Smith & Aaron Drew, 2008. "Changes in the transmission mechanism of monetary policy in New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2008/03, Reserve Bank of New Zealand.
    3. Bernard Hodgetts, 2006. "Changes in the inflation process in New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 69, pages 30p., March.

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