Should Private Expectations Concern Central Bankers?

Martin Fukač

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: We analyze the standard New Keynesian economy adjusted by a financial intermediation sector, heterogenous, imperfect knowledge, and adaptive learning. We consider two groups of agents (i) private agents (households, firms, private banks) and (ii) the central bank who differ in their knowledge and expectations. The monetary-policy transmission is non-trivial in this environment. The interest rate directly affecting the decisions of households and firms is influenced by the private banks expectations, and the monetary policy may get distorted. The basic finding suggests the higher knowledge heterogeneity, the less active monetary policy should be in order to stabilize the economy. This contrasts the standard literature with homogenous knowledge and expectations.

Keywords: Imperfect and heterogeneous knowledge; adaptive learning; monetary policy. (search for similar items in EconPapers)
JEL-codes: E52 (search for similar items in EconPapers)
Date: 2005-10
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:cer:papers:wp277

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