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Heterogeneous Expectations, Adaptive Learning,and Forward-Looking Monetary Policy

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Author Info
Martin Fukac (Reserve Bank of New Zealand)

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Abstract

In this paper, I examine the role of monetary policy in a heterogeneous expectations environment. I use a New Keynesian business cycle model as the experiment laboratory. I assume that the central bank and private economic agents (households and producing rms) have imperfect and heterogeneous information about the economy, and as a consequence, they disagree in their views on its future development. I facilitate the heterogeneous environment by assuming that all agents learn adaptively. Measured by the central bank's expected loss, the two major findings are: (i) policy that is efcient under homogeneous expectations is not effccient under heterogeneous expectations; (ii) in the short and medium run, policy that is excessively responsive to ination increases ination and output volatility, but in the long run such policy lowers economic volatility.

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File URL: http://www.rbnz.govt.nz/research/discusspapers/dp08_07.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 DP2008/07.

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Length: 24 p.
Date of creation: May 2008
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Handle: RePEc:nzb:nzbdps:2008/07

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E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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  1. Athanasios Orphanides & John C. Williams, 2002. "Imperfect knowledge, inflation expectations, and monetary policy," Working Papers in Applied Economic Theory 2002-04, Federal Reserve Bank of San Francisco. [Downloadable!]
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  2. Mankiw, N. Gregory & Reis, Ricardo & Wolfers, Justin, 2003. "Disagreement about Inflation Expectations," Research Papers 1807, Stanford University, Graduate School of Business. [Downloadable!]
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  3. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2006. "Does Inflation Targeting Make a Difference?," Working Papers 2006/13, Czech National Bank, Research Department. [Downloadable!]
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  4. George W. Evans & Seppo Honkapohja, 2003. "Adaptive learning and monetary policy design," Proceedings, Federal Reserve Bank of Cleveland, pages 1045-1084.
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  5. George W. Evans & Seppo Honkapohja, 2003. "Expectations and the Stability Problem for Optimal Monetary Policies," Review of Economic Studies, Blackwell Publishing, vol. 70(4), pages 807-824, October. [Downloadable!] (restricted)
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  6. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
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  7. Honkapohja, Seppo & Mitra, Kaushik, 2005. "Performance of monetary policy with internal central bank forecasting," Journal of Economic Dynamics and Control, Elsevier, vol. 29(4), pages 627-658, April. [Downloadable!] (restricted)
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This page was last updated on 2008-11-9.

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