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Learning, robust monetary policy and the merit of precaution

Author

Listed:
  • André Marine Charlotte

    () (Université de Strasbourg, CNRS, BETA UMR 7522, 61, Avenue de la Forêt Noire, 67085 Strasbourg Cedex, France)

  • Dai Meixing

    (Université de Strasbourg, CNRS, BETA UMR 7522, F-67000 Strasbourg, France)

Abstract

We study in a New Keynesian framework the consequences of adaptive learning for the design of robust monetary policy. Compared to rational expectations, the fact that private sector follows adaptive learning gives the central bank an additional intertemporal trade-off between optimal behavior in the present and in later periods thanks to its ability to manipulate future inflation expectations. We show that adaptive learning imposes a more restrictive constraint on monetary policy robustness to ensure the dynamic stability of the equilibrium than under rational expectations but strengthens the argument in favor of a more aggressive monetary policy when the central bank fears for model misspecifications.

Suggested Citation

  • André Marine Charlotte & Dai Meixing, 2018. "Learning, robust monetary policy and the merit of precaution," The B.E. Journal of Macroeconomics, De Gruyter, vol. 18(2), pages 1-20, June.
  • Handle: RePEc:bpj:bejmac:v:18:y:2018:i:2:p:20:n:3
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    Keywords

    adaptive learning; model uncertainty; optimal monetary policy; robust control;

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • 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

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