Two-sided Learning in New Keynesian Models: Dynamics, (Lack of) Convergence and the Value of Information

Francesca Rondina and Christian Matthes

No 661, Working Papers from Barcelona School of Economics

Abstract: This paper investigates the role of learning by private agents and the central bank (two-sided learning) in a New Keynesian framework in which both sides of the economy have asymmetric and imperfect knowledge about the true data generating process. We assume that all agents employ the data that they observe (which may be distinct for different sets of agents) to form beliefs about unknown aspects of the true model of the economy, use their beliefs to decide on actions, and revise these beliefs through a statistical learning algorithm as new information becomes available. We study the short-run dynamics of our model and derive its policy recommendations, particularly with respect to central bank communications. We demonstrate that two-sided learning can generate substantial increases in volatility and persistence, and alter the behavior of the variables in the model in a significant way. Our simulations do not converge to a symmetric rational expectations equilibrium and we highlight one source that invalidates the convergence results of Marcet and Sargent (1989). Finally, we identify a novel aspect of central bank communication in models of learning: communication can be harmful if the central bank's model is substantially mis-specified.

Keywords: asymmetric Information; monetary policy; learning (search for similar items in EconPapers)
JEL-codes: E52 (search for similar items in EconPapers)
Date: 2015-09
New Economics Papers: this item is included in nep-cta and nep-mac
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Related works:
Working Paper: Two-sided Learning in New Keynesian Models: Dynamics, (Lack of) Convergence and the Value of Information (2012)
Working Paper: Two-sided Learning in New Keynesian Models: Dynamics, (Lack of) Convergence and the Value of Information (2012)
Working Paper: Two-sided learning in New Keynesian models: Dynamics, (lack of) convergence and the value of information (2012)
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