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Optimal monetary policy under learning and structural uncertainty in a New Keynesian model with a cost channel and inflation inertia
Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Social Sciences, Department of Economics.
Univ Bamberg, Dept Econ, D-96045 Bamberg, Germany..
2016 (English)In: Journal of Economic Dynamics and Control, ISSN 0165-1889, E-ISSN 1879-1743, Vol. 69, 112-126 p.Article in journal (Refereed) Published
Abstract [en]

We investigate whether expectations-based optimal monetary policy rules under discretion and under commitment can enforce a determinate and least squares learnable rational expectations equilibrium (REE) in a New Keynesian model with inflation inertia and a cost channel of monetary policy transmission. Our numerical results show that commitment rules can enforce a determinate and learnable REE for all parameter constellations considered, whereas discretionary rules are not always able to enforce the same desirable outcome in the economy. We also examine different types of misapprehensions in policy-making and find that an incorrect assessment of the economy's true structure by the central bank greatly affects its capability to enforce a determinate and learnable, although suboptimal, REE. Thus, our numerical results highlight the relevance of this type of analysis for the design and conduct of monetary policy.

Place, publisher, year, edition, pages
2016. Vol. 69, 112-126 p.
Keyword [en]
Commitment, Determinacy, Discretion, Least Squares Learning, Misapprehension, Optimal Monetary Policy
National Category
URN: urn:nbn:se:uu:diva-302687DOI: 10.1016/j.jedc.2016.05.009ISI: 000380599100006OAI: oai:DiVA.org:uu-302687DiVA: diva2:967423
Available from: 2016-09-08 Created: 2016-09-08 Last updated: 2016-09-08Bibliographically approved

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Bask, Mikael
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