IDEAS home Printed from https://ideas.repec.org/p/ecm/nasm04/626.html
   My bibliography  Save this paper

learning optimal monetary policies

Author

Listed:
  • federico ravenna
  • richard dennis

Abstract

Central banks behave purposefully when they set monetary policy, basing their decisions upon the data that is available and upon their understanding of the economy. At the same time, policy decisions affect economic outcomes, and the likelihood of observing a given state of the world. This paper uses a DSGE model of the business cycle with nominal rigidities and habit formation to investigate how policy choices affect the policymakers' ability to learn the true structure of the economy. Central to our analysis is the fact that a central bank that wants to implement an optimal policy will need to learn about the structural equations that constrain its decisions, rather than simply about the system's reduced-form equilibrium relationships. Using the DSGE model we examine the probability with which an optimizing central bank will detect that it is using a mis-specified model. We derive conditions under which the true model can be learnt, and investigate how the random innovations and the choice of policy affect the speed at which learning is achieved. We show that it is possible for a non-optimizing policymaker - for example, a policymaker that sets policy using a forward-looking Taylor-type rule - to be able to learn about the economy more quickly than a central bank that attempts to stabilize the economy using an optimal policy. The very act of behaving optimally may in fact reduce the likelihood that equilibrium outcomes are observed that reveal the model mis-specification to the policymaker

Suggested Citation

  • federico ravenna & richard dennis, 2004. "learning optimal monetary policies," Econometric Society 2004 North American Summer Meetings 626, Econometric Society.
  • Handle: RePEc:ecm:nasm04:626
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    More about this item

    Keywords

    learning; optimal policy; model mis-specifications;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E - Macroeconomics and Monetary Economics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecm:nasm04:626. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/essssea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.