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Learning, Experimentation and Monetary Policy

Author

Listed:
  • Bertocchi, Graziella

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics ; Brown University, Department of Economics)

  • Spagat, Michael

    (Brown University, Department of Economics)

Abstract

We present a model of monetary policy where the policymaker faces uncertainty about wich he is learning in a Bayesian fashion. A fixed money supply levels. A fixed money supply rule is not optimal in this context since the learning leads to constant adjustments in money supply levels. We present cases in which it is optimal to bear some cost in terms of current output performance in order to gain information that can be used in the formulation of future monetary policy : experimentation therefore pays. We also show that even passive learning without experimentation still leads to an activist monetary policy, i.e. one that is constantly changing in response to new information.

Suggested Citation

  • Bertocchi, Graziella & Spagat, Michael, 1991. "Learning, Experimentation and Monetary Policy," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1991018, Universit√© catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  • Handle: RePEc:ctl:louvir:1991018
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    Keywords

    monetary policy;

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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