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Monetary policy and learning

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  • Lars E. O. Svensson

Abstract

A new strand of macroeconomic literature examines the relationship between learning and monetary policy-how monetary policymakers learn about the economy as they try to achieve their goals, how the public learns about policymakers' objectives, and how the public's learning, in turn, changes the way monetary policy works. An Atlanta Fed conference in March 2003 brought together some of the main contributors to this emerging literature. ; In the conference keynote address, reprinted here, Lars Svensson focused on what constitutes good monetary policy and how it is related to central-bank learning, how private-sector learning benefits from central-bank transparency, and how good monetary policy is best modeled. ; Good central banks, he noted, engage in forecast targeting: setting interest rates so that their projections of inflation and the output gap are consistent with their objectives. In particular, he argued, good central banks must devote considerable resources to monitoring and extracting private-sector expectations from various sources, use these expectations among other inputs in the forecasting process, and respond appropriately when the expectations affect the central bank's projections of inflation and the output gap. ; Svensson also stressed that central-bank transparency can improve private-sector learning and thereby induce better private-sector decisions. ; Finally, Svensson emphasized that good monetary policy is best modeled in the same way the private sector is modeled-not with ad hoc reaction functions, or instrument rules, but as goal-directed, optimizing policy with the help of targeting rules.

Suggested Citation

  • Lars E. O. Svensson, 2003. "Monetary policy and learning," Economic Review, Federal Reserve Bank of Atlanta, issue Q3, pages 11-16.
  • Handle: RePEc:fip:fedaer:y:2003:i:q3:p:11-16:n:v.88no.3
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    References listed on IDEAS

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    1. George W. Evans & Seppo Honkapohja, 2006. "Monetary Policy, Expectations and Commitment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(1), pages 15-38, March.
    2. Lars E.O. Svensson & Michael Woodford, 2004. "Implementing Optimal Policy through Inflation-Forecast Targeting," NBER Chapters,in: The Inflation-Targeting Debate, pages 19-92 National Bureau of Economic Research, Inc.
    3. Preston, Bruce, 2008. "Adaptive learning and the use of forecasts in monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3661-3681, November.
    4. Svensson, Lars E O, 2002. "The Inflation Forecast and the Loss Function," CEPR Discussion Papers 3365, C.E.P.R. Discussion Papers.
    5. Thomas J. Sargent & Noah Williams, 2005. "Impacts of Priors on Convergence and Escapes from Nash Inflation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 360-391, April.
    6. Faust, Jon & Svensson, Lars E O, 2001. "Transparency and Credibility: Monetary Policy with Unobservable Goals," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(2), pages 369-397, May.
    7. Marc Giannoni & Michael Woodford, 2004. "Optimal Inflation-Targeting Rules," NBER Chapters,in: The Inflation-Targeting Debate, pages 93-172 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Andros Gregoriou & Alexandros Kontonikas, 2006. "Inflation Targeting And The Stationarity Of Inflation: New Results From An Estar Unit Root Test," Bulletin of Economic Research, Wiley Blackwell, vol. 58(4), pages 309-322, October.
    2. Carin van der Cruijsen & Sylvester Eijffinger, 2007. "The economic impact of central bank transparency: a survey," DNB Working Papers 132, Netherlands Central Bank, Research Department.
    3. James B. Bullard, 2006. "The learnability criterion and monetary policy," Review, Federal Reserve Bank of St. Louis, issue May, pages 203-217.
    4. Oleg Korenok & Stanislav Radchenko, 2005. "Expectations Anchoring in Inflation Targeting Regimes," Working Papers 0503, VCU School of Business, Department of Economics.
    5. Papadamou, Stephanos, 2013. "Market anticipation of monetary policy actions and interest rate transmission to US Treasury market rates," Economic Modelling, Elsevier, vol. 33(C), pages 545-551.
    6. Ellis W. Tallman, 2003. "Monetary policy and learning: Some implications for policy and research," Economic Review, Federal Reserve Bank of Atlanta, issue Q3, pages 1-9.
    7. Wasim Shahid Malik & Musleh-ud Din, 2008. "Monetary Policy Transparency in Pakistan: An Independent Analysis," PIDE-Working Papers 2008:44, Pakistan Institute of Development Economics.
    8. Berardi, Michele & Duffy, John, 2007. "The value of central bank transparency when agents are learning," European Journal of Political Economy, Elsevier, vol. 23(1), pages 9-29, March.
    9. Lavan Mahadeva, 2007. "A model of market surprises," Bank of England working papers 327, Bank of England.
    10. Fabio Milani, 2005. "Adaptive Learning and Inflation Persistence," Working Papers 050607, University of California-Irvine, Department of Economics.

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    Keywords

    Monetary policy;

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