Heterogeneous Expectations, Adaptive Learning,and Forward-Looking Monetary Policy

Martin Fukac ()

No DP2008/07, Reserve Bank of New Zealand Discussion Paper Series from Reserve Bank of New Zealand

Abstract: In this paper, I examine the role of monetary policy in a heterogeneous expectations environment. I use a New Keynesian business cycle model as the experiment laboratory. I assume that the central bank and private economic agents (households and producing rms) have imperfect and heterogeneous information about the economy, and as a consequence, they disagree in their views on its future development. I facilitate the heterogeneous environment by assuming that all agents learn adaptively. Measured by the central bank's expected loss, the two major findings are: (i) policy that is efcient under homogeneous expectations is not effccient under heterogeneous expectations; (ii) in the short and medium run, policy that is excessively responsive to ination increases ination and output volatility, but in the long run such policy lowers economic volatility.

JEL-codes: E4 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2008-05
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Persistent link: http://EconPapers.repec.org/RePEc:nzb:nzbdps:2008/07

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