Learning and Signals under Discretionary Monetary Policy

Stefano Marzioni

Economic Notes, 2014, vol. 43, issue 3, 211-231

Abstract: type="main" xml:lang="en">

This paper aims at assessing the relevance of communicating central bank's forecasts to the private sector under discretionary monetary policy. In a New Keynesian environment, the central bank and the private sector have different information sets. The private sector uses the central bank's expectations as a signal in order to update its priors, which are constituted by standard adaptive learning expectations. E-stability is positively affected by a high correlation between actual inflation and the signal about inflation. Numerical simulations show that the presence of signals is beneficial both in the long and in the short run.

Date: 2014
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