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Optimal Monetary Policy under Learning in a New Keynesian Model with Cost Channel and Inflation Inertia

Author

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  • Bask, Mikael

    () (Department of Economics)

  • Proaño, Christian R

    (Department of Economics)

Abstract

We show that a so-called expectations-based optimal monetary policy rule has desirable properties in a standard New Keynesian model augmented with a cost channel and inflation rate expectations that are partly backward-looking. In particular, optimal monetary policy under commitment is associated with a determinate rational expectations equilibrium that is stable under least squares learning for all parameter constellations considered, whereas, under discretion in policy-making, the central bank has to be sufficiently inflation rate averse for the rational expectations equilibrium to have the same properties.

Suggested Citation

  • Bask, Mikael & Proaño, Christian R, 2012. "Optimal Monetary Policy under Learning in a New Keynesian Model with Cost Channel and Inflation Inertia," Working Paper Series 2012:7, Uppsala University, Department of Economics.
  • Handle: RePEc:hhs:uunewp:2012_007
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    References listed on IDEAS

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    More about this item

    Keywords

    Commitment; Cost Channel; Determinacy; Discretion; Inflation Inertia; Least Squares Learning; Optimal Monetary Policy;

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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