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Learning, expectations and monetary policy

Pablo Garcia Sanchez

No 153, BCL working papers from Central Bank of Luxembourg

Abstract: I present a New Keynesian model in which the central bank’s anti-inflationary preferences change over time. Agents do not observe the current monetary regime, but rationally learn about it using Bayes theorem. The model provides a structural interpretation for the contractionary effects of monetary policy uncertainty shocks as recently documented in the empirical literature. In addition, the model shows that learning reduces the effects of monetary policy on the economy by softening the link between fundamentals and equilibrium prices and allocations.

Keywords: C11; D83; E52 (search for similar items in EconPapers)
JEL-codes: C11 D83 E52 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2021-02
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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