Should Private Expectations Concern Central Bankers?
We analyze the standard New Keynesian economy adjusted by a financial intermediation sector, heterogenous, imperfect knowledge, and adaptive learning. We consider two groups of agents (i) private agents (households, firms, private banks) and (ii) the central bank who differ in their knowledge and expectations. The monetary-policy transmission is non-trivial in this environment. The interest rate directly affecting the decisions of households and firms is influenced by the private banks expectations, and the monetary policy may get distorted. The basic finding suggests the higher knowledge heterogeneity, the less active monetary policy should be in order to stabilize the economy. This contrasts the standard literature with homogenous knowledge and expectations.
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- Giuseppe Ferrero, 2004.
"Monetary Policy and the Transition to Rational Expectations,"
Temi di discussione (Economic working papers)
499, Bank of Italy, Economic Research and International Relations Area.
- Giuseppe Ferrero, 2004. "Monetary Policy and the Transition to Rational Expectations," Econometric Society 2004 North American Summer Meetings 101, Econometric Society.
- Giuseppe Ferrero, 2004. "Monetary policy and the transition to rational expectations," Computing in Economics and Finance 2004 19, Society for Computational Economics.
- James B. Bullard & Kaushik Mitra, 2002.
"Learning about monetary policy rules,"
2000-001, Federal Reserve Bank of St. Louis.
- Preston, Bruce, 2006. "Adaptive learning, forecast-based instrument rules and monetary policy," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 507-535, April.
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