Monetary Policy and the Transition to Rational Expectations

No 499, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research Department

Abstract: Under the assumption of bounded rationality, economic agents learn from their past mistaken predictions by combining new and old information to form new beliefs. The purpose of this paper is to examine how the policy-maker, by affecting private agents' learning process, determines the speed at which the economy converges to the rational expectation equilibrium. I find that by reacting strongly to private agents' expected inflation, a central bank would increase the speed of convergence. I assess the relevance of the transition period when looking at a criterion for evaluating monetary policy decisions and suggest that a fast convergence is not always suitable.

Keywords: Interest Rate Setting; Adaptive Learning; Rational Expectations; Speed of Convergence (search for similar items in EconPapers)
JEL-codes: E52 C62 D83 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: Written 2004-06
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Related works:
Working Paper: Monetary policy and the transition to rational expectations (2004)
Working Paper: Monetary Policy and the Transition to Rational Expectations (2004)
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