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Monetary policy and learning in an open economy

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Author Info
Martin Ellison (University of Warwick & CEPR)
Lucio Sarno (Warwick Business School & CEPR)
Jouko Vilmunen (Bank of Finland)

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Abstract

In this paper, we examine the incentives for central bank activism and caution in a two-country open-economy model with uncertainty and learning. We find that the presence of a strategic interaction between the home and foreign central banks creates an additional motivation for caution in monetary policy. An activist policy designed to help the learning of the home central bank is suboptimal since it generates a strong reaction from the foreign central bank. As joint learning by the home and foreign central banks is shown to be detrimental to welfare, the optimal policy is cautious.

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Paper provided by EconWPA in its series Macroeconomics with number 0404022.

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Date of creation: 26 Apr 2004
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Handle: RePEc:wpa:wuwpma:0404022

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Related research
Keywords: activism; learning; monetary policy; open economy;

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Find related papers by JEL classification:
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  3. Bertocchi, Graziella & Spagat, Michael, 1991. "Learning, Experimentation and Monetary Policy," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1991018, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    Other versions:
  4. Svensson, Lars E O, 1999. "Price-Level Targeting versus Inflation Targeting: A Free Lunch?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 277-95, August.
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  5. Mirman, L.J. & Samuelson, L. & Urbano, A., 1989. "Monopoly Experimentation," Papers 8-89-7, Pennsylvania State - Department of Economics.
    Other versions:
    • Amparo Urbano & Larry Samuelson & Leonard J. Mirman, 1990. "Monopoly Experimentation," Working Papers. Serie AD 1990-04, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
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  6. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608.
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  8. Balvers, Ronald J & Cosimano, Thomas F, 1994. "Inflation Variability and Gradualist Monetary Policy," Review of Economic Studies, Blackwell Publishing, vol. 61(4), pages 721-38, October. [Downloadable!] (restricted)
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  10. Beck, Gunter W. & Wieland, Volker, 2002. "Learning and control in a changing economic environment," Journal of Economic Dynamics and Control, Elsevier, vol. 26(9-10), pages 1359-1377, August. [Downloadable!] (restricted)
  11. Volker Wieland, 1998. "Monetary policy and uncertainty about the natural unemployment rate," Finance and Economics Discussion Series 1998-22, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  12. Aghion, Philippe & Espinosa, Maria Paz & Jullien, Bruno, 1993. "Dynamic Duopoly with Learning through Market Experimentation," Economic Theory, Springer, vol. 3(3), pages 517-39, July.
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  13. Kiefer, Nicholas M & Nyarko, Yaw, 1989. "Optimal Control of an Unknown Linear Process with Learning," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(3), pages 571-86, August. [Downloadable!] (restricted)
  14. Ellison, Martin & Valla, Natacha, 2001. "Learning, uncertainty and central bank activism in an economy with strategic interactions," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 153-171, August. [Downloadable!] (restricted)
    Other versions:
  15. Basar, Tamer & Salmon, Mark, 1990. "Credibility and the value of information transmission in a model of monetary policy and inflation," Journal of Economic Dynamics and Control, Elsevier, vol. 14(1), pages 97-116, February. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Suvanto , Antti & Hukkinen , Juhana, 2004. "Stable price level and changing prices," Research Discussion Papers 28/2004, Bank of Finland. [Downloadable!]
  2. Hyytinen, Ari & Takalo , Tuomas, 2004. "Multihoming in the market for payment media: evidence from young Finnish consumers," Research Discussion Papers 25/2004, Bank of Finland. [Downloadable!]
    Other versions:
  3. Puhakka, Mikko, 2004. "Equilibrium dynamics under lump-sum taxation in an exchange economy with skewed endowments," Research Discussion Papers 29/2004, Bank of Finland. [Downloadable!]
  4. Mikko Puhakka, 2005. "Equilibrium dynamics under lump-sum taxation in an exchange economy with skewed endowments," Macroeconomics 0508033, EconWPA. [Downloadable!]
  5. Antti Suvanto & Juhana Hukkinen, 2005. "Stable price level and changing prices," Macroeconomics 0508034, EconWPA. [Downloadable!]
  6. Mälkönen , Ville, 2004. "The efficiency implications of financial conglomeration," Research Discussion Papers 17/2004, Bank of Finland. [Downloadable!]
  7. Leitemo, Kai & Söderström , Ulf, 2004. "Robust monetary policy in the New-Keynesian framework," Research Discussion Papers 31/2004, Bank of Finland. [Downloadable!]
    Other versions:
  8. Jokivuolle , Esa & Lanne , Markku, 2004. "Trading Nokia: The roles of the Helsinki vs the New York stock exchanges," Research Discussion Papers 26/2004, Bank of Finland. [Downloadable!]
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