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Expectations Stability when the Central Bank Learns from its Self-referenced Forecasts

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  • Luis Edgar Basto Mercado

Abstract

In adaptive learning literature it has been argued that the intensity of a Central Bank’s (CB) interest rate response to expected inflation must be more than proportional. This article provides reassurance to the CB to some extent, showing that if it learns in a more sophisticated way than with adaptive learning, the policy response does not have to be as strong. Particularly, it proposes self-referenced learning for the CB to consider that its own expectations affect inflation itself. This is highly realistic because CBs dedicate resources to generating expectations for economic variables.

Suggested Citation

  • Luis Edgar Basto Mercado, 2025. "Expectations Stability when the Central Bank Learns from its Self-referenced Forecasts," Estudios de Economia, University of Chile, Department of Economics, vol. 52(1 Year 20), pages 97-132, June.
    • Handle: RePEc:udc:esteco:v:52:y:2025:i:2:p:97-132
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    File URL: https://estudiosdeeconomia.uchile.cl/index.php/EDE/article/view/78264/78995
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    More about this item

    Keywords

    Adaptive learning; expectational stability; Taylor principle; self-referenced learning;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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