Optimal Monetary Policy under Learning in a New Keynesian Model with Cost Channel and Inflation Inertia

Mikael Bask and Christian Proaño

No 2012:7, Working Paper Series from Uppsala University, Department of Economics

Abstract: We show that a so-called expectations-based optimal monetary policy rule has desirable properties in a standard New Keynesian model augmented with a cost channel and inflation rate expectations that are partly backward-looking. In particular, optimal monetary policy under commitment is associated with a determinate rational expectations equilibrium that is stable under least squares learning for all parameter constellations considered, whereas, under discretion in policy-making, the central bank has to be sufficiently inflation rate averse for the rational expectations equilibrium to have the same properties.

Keywords: Commitment; Cost Channel; Determinacy; Discretion; Inflation Inertia; Least Squares Learning; Optimal Monetary Policy (search for similar items in EconPapers)
JEL-codes: C62 E52 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2012-02-28
New Economics Papers: this item is included in nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:uunewp:2012_007

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