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Some implications of learning for price stability

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  • Eusepi, Stefano
  • Giannoni, Marc P.
  • Preston, Bruce

Abstract

Survey data on expectations of a range of macroeconomic variables exhibit low-frequency drift. In a New Keynesian model consistent with these empirical properties, optimal policy in general delivers a positive inflation rate in the long run. Two special cases deliver classic outcomes under rational expectations: as the degree of low-frequency variation in beliefs goes to zero, the long-run inflation rate coincides with the inflation bias under optimal discretion; for non-zero low-frequency drift in beliefs, as households become highly patient valuing utility in any period equally, the optimal long-run inflation rate coincides with optimal commitment – price stability is optimal. The optimal state-contingent response to cost-push disturbances similarly reflects properties of optimal discretion and optimal commitment, depending on the degree of low-frequency variation in beliefs. When beliefs exhibit substantial variation in response to short-run forecast errors, optimal policy is closer to commitment.

Suggested Citation

  • Eusepi, Stefano & Giannoni, Marc P. & Preston, Bruce, 2018. "Some implications of learning for price stability," European Economic Review, Elsevier, vol. 106(C), pages 1-20.
  • Handle: RePEc:eee:eecrev:v:106:y:2018:i:c:p:1-20
    DOI: 10.1016/j.euroecorev.2018.03.002
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    Cited by:

    1. Mele, Antonio & Molnar, Krisztina & Santoro, Sergio, 2014. "On the perils of stabilizing prices when agents are learning," Discussion Paper Series in Economics 1/2015, Norwegian School of Economics, Department of Economics.
    2. Mele, Antonio & Molnár, Krisztina & Santoro, Sergio, 2020. "On the perils of stabilizing prices when agents are learning," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 339-353.
    3. Marine Charlotte André & Meixing Dai, 2018. "The limits to robust monetary policy in a small open economy with learning agents," Working Papers of BETA 2018-45, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.

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    More about this item

    Keywords

    Optimal monetary policy; Learning dynamics; Price stability;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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