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Nominal Interest Rate Rules under Heterogeneous Beliefs

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  • Hehui JIN

    (Quantify Solutions, NJ, USA)

Abstract

This paper presents simple models with competitive markets, fully flexible prices and fully observable macro-economic variables. Agents hold heterogeneous beliefs because the exogenous shocks are stable but non-stationary and the true law of motion is unknown to agents. We show that the diversity of beliefs enables monetary policy to have real effects and the fluctuations in beliefs cause excess volatilities in real economy. By log-linearization we derive a version of the aggregate supply curve which relates aggregate employment to the discrepancies between the market forecast of inflation rate and the stationary forecast of it. The computational results demonstrate that monetary policy rules can dramatically reduce consumption volatility and there is a tradeoff between stability of consumption and inflation. The results are thus comparable with Kurz - Jin - Motolese (2003).

Suggested Citation

  • Hehui JIN, 2007. "Nominal Interest Rate Rules under Heterogeneous Beliefs," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 115(3), pages 403-442.
  • Handle: RePEc:vep:journl:y:2007:v:115:i:3:p:403-442
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    References listed on IDEAS

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    Cited by:

    1. Kurz, Mordecai & Piccillo, Giulia & Wu, Howei, 2013. "Modeling diverse expectations in an aggregated New Keynesian Model," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1403-1433.

    More about this item

    Keywords

    Money non-neutrality; Philips curve; Heterogenous beliefs; Rational beliefs; Stabilization policy; Nominal interest rate rule;

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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