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Monetary policy and learning from the central bank's forecast

  • Muto, Ichiro

We examine the expectational stability (E-stability) of rational expectations equilibrium (REE) in a standard New Keynesian model in which private agents refer to the central bank's forecast in the process of adaptive learning. To satisfy the E-stability condition in this environment, the central bank must respond more strongly to the expected inflation rate than the extent to which the Taylor principle suggests. However, the central bank's strong reaction to the expected inflation rate raises the possibility of indeterminacy of the REE. In considering these problems, a robust policy requires responding to the current inflation rate to a certain degree.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 1 (January)
Pages: 52-66

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:1:p:52-66
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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