Some implications of learning for price stability

Stefano Eusepi, Marc Giannoni and Bruce Preston

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: Survey data on expectations of a range of macroeconomic variables exhibit low-frequency drift. In a New Keynesian model consistent with these empirical properties, optimal policy in general delivers a positive inflation rate in the long run. Two special cases deliver classic outcomes under rational expectations: as the degree of low-frequency variation in beliefs goes to zero, the long-run inflation rate coincides with the inflation bias under optimal discretion; for non-zero low-frequency drift in beliefs, as households become highly patient valuing utility in any period equally, the optimal long-run inflation rate coincides with optimal commitment - price stability is optimal.

Keywords: Optimal monetary policy; Learning dynamics; Price stability (search for similar items in EconPapers)
JEL-codes: D83 D84 E32 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2017-01
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Some implications of learning for price stability (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2017-08

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