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Some implications of learning for price stability

Author

Listed:
  • Stefano Eusepi
  • Marc P. Giannoni
  • Bruce Preston

Abstract

Survey data on expectations of a range of macroeconomic variables exhibit low-frequency drift. In a New Keynesian model consistent with these empirical properties, optimal policy in general delivers a positive inflation rate in the long run. Two special cases deliver classic outcomes under rational expectations: as the degree of low-frequency variation in beliefs goes to zero, the long-run inflation rate coincides with the inflation bias under optimal discretion; for non-zero low-frequency drift in beliefs, as households become highly patient valuing utility in any period equally, the optimal long-run inflation rate coincides with optimal commitment - price stability is optimal.

Suggested Citation

  • Stefano Eusepi & Marc P. Giannoni & Bruce Preston, 2017. "Some implications of learning for price stability," CAMA Working Papers 2017-08, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2017-08
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2017-01/8_2017_eusepi_giannoni_preston.pdf
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    References listed on IDEAS

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    Cited by:

    1. Mele, Antonio & Molnar, Krisztina & Santoro, Sergio, 2014. "On the perils of stabilizing prices when agents are learning," Discussion Paper Series in Economics 1/2015, Norwegian School of Economics, Department of Economics.

    More about this item

    Keywords

    Optimal monetary policy; Learning dynamics; Price stability;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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