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Monetary Policy and Learning from the Central Bank's Forecast

  • Ichiro Muto

    (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:

We examine the expectational stability (E-stability) of the rational expectations equilibrium (REE) in a simple New Keynesian model in which private agents engage in adaptive learning by referring to the central bank's forecast. In this environment, to satisfy the E-stability condition, the central bank must respond more strongly to the expected inflation rate than the so-called Taylor principle suggests. On the other hand, the central bank's strong reaction to the expected inflation rate raises the possibility of indeterminacy of the REE. In considering these problems, a robust policy is to respond to the current inflation rate to a certain degree.

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Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 08-E-01.

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Date of creation: Jan 2008
Date of revision:
Handle: RePEc:ime:imedps:08-e-01
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  3. Honkapohja, Seppo & Mitra, Kaushik, 2002. "Performance of monetary policy with internal central bank forecasting," Working Paper Series 0127, European Central Bank.
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  8. George W. Evans & Seppo Honkapohja, 2004. "Adaptive learning and monetary policy design," Macroeconomics 0405008, EconWPA.
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  10. Howitt, Peter, 1992. "Interest Rate Control and Nonconvergence to Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 776-800, August.
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  13. Bruce Preston, 2003. "Learning about monetary policy rules when long-horizon expectations matter," FRB Atlanta Working Paper No. 2003-18, Federal Reserve Bank of Atlanta.
  14. Kobayashi, Teruyoshi & Muto, Ichiro, 2010. "A note on expectational stability under non-zero trend inflation," MPRA Paper 22952, University Library of Munich, Germany.
  15. Stefano Eusepi & James Bullard, 2008. "When Does Determinacy Imply Expectational Stability?," 2008 Meeting Papers 897, Society for Economic Dynamics.
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  18. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  19. Branch, William A. & McGough, Bruce, 2009. "A New Keynesian model with heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 33(5), pages 1036-1051, May.
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