Learning About the Term Structure and Optimal Rules for Inflation Targeting

Eric Schaling (), Sylvester Eijffinger and Mewael F. Tesfaselassie

No 5896, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this paper we incorporate the term structure of interest rates in a standard inflation forecast targeting framework. We find that under flexible inflation targeting and uncertainty in the degree of persistence in the economy, allowing for active learning possibilities has effects on the optimal interest rate rule followed by the central bank. For a wide range of possible initial beliefs about the unknown parameter, the dynamically optimal rule is in general more activist, in the sense of responding aggressively to the state of the economy, than the myopic rule for small to moderate deviations of the state variable from its target. On the other hand, for large deviations, the optimal policy is less activist than the myopic and the certainty equivalence policies.

Keywords: Learning; Rational expectations; Separation principle; Term structure of interest rates (search for similar items in EconPapers)
JEL-codes: C53 E43 E52 F33 (search for similar items in EconPapers)
Date: 2006-10
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
https://cepr.org/publications/DP5896 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Learning about the Term Structure and Optimal Rules for Inflation Targeting (2011)
Journal Article: Learning about the Term Structure and Optimal Rules for Inflation Targeting (2011)
Working Paper: Learning About the Term Structure and Optimal Rules for Inflation Targeting (2006)
Working Paper: Learning about the Term Structure and Optimal Rules for Inflation Targeting (2006)
Working Paper: Learning about the Term Structure and Optimal Rules for Inflation Targeting (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:5896

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP5896

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().