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Monetary policy with heterogeneous and misspecified expectations

  • Michele Berardi

In recent literature on monetary policy and learning, it has been suggested that private sector’s expectations should play a role in the policy rule implemented by the central bank, as they could improve the ability of the policymaker to stabilize the economy. Private sector’s expectations, in these studies, are often taken to be homogeneous and rational, at least in the limit of a learning process. In this paper, instead, we consider the case in which private agents are heterogeneous in their expectations formation mechanisms and hold heterogeneous expectations in equilibrium. We investigates the impact of this heterogeneity in expectations on central bank’s policy implementation and on the ensuing economic outcomes.

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File URL: http://hummedia.manchester.ac.uk/schools/soss/cgbcr/discussionpapers/dpcgbcr81.pdf
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Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 81.

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Length: 27 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:man:cgbcrp:81
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  1. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  2. Bennett T. McCallum & Edward Nelson, 1998. "Performance of operational policy rules in an estimated semi-classical structural model," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  3. Kaushik Mitra & Seppo Honkapohja, 2004. "Learning Stability in Economies with Heterogenous Agents," Royal Holloway, University of London: Discussion Papers in Economics 04/17, Department of Economics, Royal Holloway University of London, revised Jul 2004.
  4. McCallum, Bennett T., 1983. "On non-uniqueness in rational expectations models : An attempt at perspective," Journal of Monetary Economics, Elsevier, vol. 11(2), pages 139-168.
  5. Giuseppe Ferrero, 2004. "Monetary policy and the transition to rational expectations," Computing in Economics and Finance 2004 19, Society for Computational Economics.
  6. Michael Woodford, 1999. "Optimal monetary policy inertia," Proceedings, Federal Reserve Bank of San Francisco.
  7. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  8. Michael Woodford, 2000. "Pitfalls of Forward-Looking Monetary Policy," American Economic Review, American Economic Association, vol. 90(2), pages 100-104, May.
  9. Berardi, Michele, 2007. "Heterogeneity and misspecifications in learning," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3203-3227, October.
  10. Krisztina Molnár & Sergio Santoro, 2010. "Optimal Monetary Policy when Agents are Learning," CESifo Working Paper Series 3072, CESifo Group Munich.
  11. Bennett T. McCallum, 1998. "Solutions to Linear Rational Expectations Models: A Compact Exposition," NBER Technical Working Papers 0232, National Bureau of Economic Research, Inc.
  12. Berardi, Michele & Duffy, John, 2007. "The value of central bank transparency when agents are learning," European Journal of Political Economy, Elsevier, vol. 23(1), pages 9-29, March.
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