On the Perils of Stabilizing Prices when Agents are Learning

Antonio Mele, Krisztina Molnar and Sergio Santoro

No 5173, CESifo Working Paper Series from CESifo

Abstract: We show that price level stabilization is not optimal in an economy where agents have incomplete knowledge about the policy implemented and try to learn it. A systematically more accommodative policy than what agents expect generates short term gains without triggering an abrupt loss of confidence, since agents update expectations sluggishly. In the long run agents learn the policy implemented, and the economy converges to a rational ex- pectations equilibrium in which policy does not stabilize prices, economic volatility is high, and agents suffer the corresponding welfare losses. However, these losses are outweighed by short term gains from the learning phase.

Keywords: optimal monetary policy; learning; price level targeting (search for similar items in EconPapers)
JEL-codes: C62 D83 D84 E52 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: On the perils of stabilizing prices when agents are learning (2020)
Working Paper: On the perils of stabilizing prices when agents are learning (2018)
Working Paper: On the perils of stabilizing prices when agents are learning (2015)
Working Paper: On the perils of stabilizing prices when agents are learning (2014)
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