Monetary Authorities' Forecasts And The Inflation Targeting Monetary Policy
Alternative Inflation Target monetary policies have been usually studied under the perfect foresight hypothesis. We consider such monetary policies in a bounded rationality framework. In this case, we can distinguish two different scenarios. It is possible to assume bounded rationality only from the agents' side, or to consider a monetary authority characterized by bounded rationality too. In the latter case two facts become important. At first, agents' expectations with respect to the inflation will contribute to determine the money demand; on the other hand, the Central Bank forecasts about agents' expectations will affect the optimal policy choice, in order to achieve the inflation target. We will study the stability properties of these models in a discrete time dynamic framework, particularly considering this "forecasting the forecasts of others'' scheme, which seems to represent the monetary authority behavior in a very realistic way. We characterize the stability of the Perfect Foresight Equilibrium with respect to the inflation target and to the agents' memory.
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|Date of creation:||05 Jul 2000|
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