Expectations Stability when the Central Bank Learns from its Self-referenced Forecasts

Luis Edgar Basto Mercado ()

Estudios de Economia, 2025, vol. 52, issue 1 Year 2025, 97-132

Abstract: In adaptive learning literature it has been argued that the intensity of a Central Bank’s (CB) interest rate response to expected inflation must be more than proportional. This article provides reassurance to the CB to some extent, showing that if it learns in a more sophisticated way than with adaptive learning, the policy response does not have to be as strong. Particularly, it proposes self-referenced learning for the CB to consider that its own expectations affect inflation itself. This is highly realistic because CBs dedicate resources to generating expectations for economic variables.

Keywords: Adaptive learning; expectational stability; Taylor principle; self-referenced learning (search for similar items in EconPapers)
JEL-codes: D84 E52 (search for similar items in EconPapers)
Date: 2025
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