Monetary Policy and Learning from the Central Bank's Forecast

Ichiro Muto

No 08-E-01, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: We examine the expectational stability (E-stability) of the rational expectations equilibrium (REE) in a simple New Keynesian model in which private agents engage in adaptive learning by referring to the central bank's forecast. In this environment, to satisfy the E-stability condition, the central bank must respond more strongly to the expected inflation rate than the so-called Taylor principle suggests. On the other hand, the central bank's strong reaction to the expected inflation rate raises the possibility of indeterminacy of the REE. In considering these problems, a robust policy is to respond to the current inflation rate to a certain degree.

Keywords: Adaptive Learning; E-stability; New Keynesian Model; Monetary Policy; Taylor principle (search for similar items in EconPapers)
JEL-codes: D84 E52 (search for similar items in EconPapers)
Date: 2008-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (14)

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Journal Article: Monetary policy and learning from the central bank's forecast (2011)
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