Optimal Monetary Policy under Heterogeneous Expectations

Orlando Gomes ()

Macroeconomics from EconWPA

Abstract: Monetary policy has an important role in the determination of the inflation rate and the output gap time trajectories. Monetary authorities should choose the nominal interest rate time path that best serves the goals of price stability (primarily) and output growth (as a consequence of the first). In this paper it is presented a framework under which an optimal interest rate rule is computed, and this rule is found to be stabilizing. The stability result is true for a homogeneous expectations scenario, where all individuals believe that inflation converges to a long run low level. Introducing expectations heterogeneity under a bounded rationality – discrete choice setup, this result continues to hold, but now we cannot exclude periods of strong price instability that, nevertheless, do not tend to persist for long periods of time.

Keywords: Optimal monetary policy; Price stability; Inflation targeting; Heterogeneous expectations; Bounded rationality; Discrete choice (search for similar items in EconPapers)
JEL-codes: E43 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dcm, nep-mac and nep-mon
Date: 2004-09-28
Note: Type of Document - pdf; pages: 32
View list of references

Downloads: (external link)
http://129.3.20.41/eps/mac/papers/0409/0409023.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpma:0409023

Access Statistics for this paper

More papers in Macroeconomics from EconWPA
Series data maintained by EconWPA ().