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Central bank learning and monetary policy

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  • Tesfaselassie, Mewael F.

Abstract

We analyze optimal monetary policy when a central bank has to learn about an unknown coefficient that determines the effect of surprise inflation on aggregate demand. We derive the optimal policy under active learning and compare it to two limiting cases-certainty equivalence policy and cautionary policy, in which learning takes place passively. Our novel result is that the two passive learning policies represent an upper and lower bound for the active learning policy, irrespective of the state of the economy.

Suggested Citation

  • Tesfaselassie, Mewael F., 2008. "Central bank learning and monetary policy," Kiel Working Papers 1444, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwkwp:1444
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Parameter uncertainty; learning; monetary policy;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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