 Inflation Expectations, Adaptive Learning and Optimal Monetary PolicyVitor Gaspar, Frank Smets and David Vestin Chapter 19 in Handbook of Monetary Economics, 2010, vol. 3, pp 1055-1095 from Elsevier Abstract: This chapter investigates the implications of adaptive learning in the private sector's formation of inflation expectations for the conduct of monetary policy. We first review the literature that studies the implications of adaptive learning processes for macroeconomic dynamics under various monetary policy rules. We then analyze optimal monetary policy in the standard New Keynesian model, when the central bank minimizes an explicit loss function and has full information about the structure of the economy, including the precise mechanism generating private sector's expectations. The focus on optimal policy allows us to investigate how and to what extent a change in the assumption of how agents form their inflation expectations affects the principles of optimal monetary policy. It also provides a benchmark to evaluate simple policy rules. We find that departures from rational expectations increase the potential for instability in the economy, strengthening the importance of anchoring inflation expectations. We also find that the simple commitment rule under rational expectations is robust when expectations are formed in line with adaptive learning. Keywords: Adaptive Learning; Optimal Monetary Policy; Policy Rules; Rational Expectations (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:monchp:3-19 Access Statistics for this chapter More chapters in Handbook of Monetary Economics from Elsevier |
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