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An Example of Robustly Optimal Monetary Policy with Near-Rational Expectations

Michael Woodford ()

Journal of the European Economic Association, 2006, vol. 4, issue 2-3, 386-395

Abstract: This paper considers optimal monetary stabilization policy in a forward-looking model, when the central bank recognizes that private-sector expectations need not be precisely model-consistent and wishes to choose a policy that will be as good as possible in the case of any beliefs that are close enough to model-consistency. It is found that commitment continues to be important for optimal policy, that the optimal long-run inflation target is unaffected by the degree of potential distortion of beliefs, and that optimal policy is even more history-dependent than if rational expectations are assumed. (JEL: E52) (c) 2006 by the European Economic Association.

Date: 2006
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