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Optimal monetary policy under learning and structural uncertainty in a New Keynesian model with a cost channel and inflation inertia

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  • Bask, Mikael
  • Proaño, Christian R.

Abstract

We investigate whether expectations-based optimal monetary policy rules under discretion and under commitment can enforce a determinate and least squares learnable rational expectations equilibrium (REE) in a New Keynesian model with inflation inertia and a cost channel of monetary policy transmission. Our numerical results show that commitment rules can enforce a determinate and learnable REE for all parameter constellations considered, whereas discretionary rules are not always able to enforce the same desirable outcome in the economy. We also examine different types of misapprehensions in policy-making and find that an incorrect assessment of the economy׳s true structure by the central bank greatly affects its capability to enforce a determinate and learnable, although suboptimal, REE. Thus, our numerical results highlight the relevance of this type of analysis for the design and conduct of monetary policy.

Suggested Citation

  • Bask, Mikael & Proaño, Christian R., 2016. "Optimal monetary policy under learning and structural uncertainty in a New Keynesian model with a cost channel and inflation inertia," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 112-126.
  • Handle: RePEc:eee:dyncon:v:69:y:2016:i:c:p:112-126
    DOI: 10.1016/j.jedc.2016.05.009
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    Keywords

    C62; E52; Commitment; Determinacy; Discretion; Least Squares Learning; Misapprehension; Optimal Monetary Policy;

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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