Monetary policy and learning from the central bank's forecast

Ichiro Muto

Journal of Economic Dynamics and Control, 2011, vol. 35, issue 1, 52-66

Abstract: We examine the expectational stability (E-stability) of rational expectations equilibrium (REE) in a standard New Keynesian model in which private agents refer to the central bank's forecast in the process of adaptive learning. To satisfy the E-stability condition in this environment, the central bank must respond more strongly to the expected inflation rate than the extent to which the Taylor principle suggests. However, 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 requires responding 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)
Date: 2011
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Citations: View citations in EconPapers (18)

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Working Paper: Monetary Policy and Learning from the Central Bank's Forecast (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:35:y:2011:i:1:p:52-66

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