EconPapers    
Economics at your fingertips  
 

Imperfect knowledge, inflation expectations, and monetary policy

Athanasios Orphanides () and John Williams ()

No 2002-27, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (US)

Abstract: This paper investigates the role of imperfect knowledge regarding the structure of the economy on the formation of expectations, macroeconomic dynamics, and the efficient formulation of monetary policy. Economic agents rely on an adaptive learning technology to form expectations and continuously update their beliefs regarding the dynamic structure of the economy based on incoming data. The process of perpetual learning introduces an additional layer of dynamic interactions between monetary policy and economic outcomes. We find that policies that would be efficient under rational expectations can perform poorly when knowledge is imperfect. In particular, policies that fail to maintain tight control over inflation are prone to episodes in which the public's expectations of inflation becomes uncoupled from the policy objective and stagflation results, in a pattern similar to that experienced in the United States during the 1970s. More generally, we show that in the presence of imperfect knowledge, policy should respond more aggressively to inflation than under perfect knowledge.

Keywords: Monetary policy; Inflation (Finance) (search for similar items in EconPapers)
Date: 2002
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (34) Track citations by RSS feed

Downloads: (external link)
http://www.federalreserve.gov/pubs/feds/2002/200227/200227abs.html (text/html)
http://www.federalreserve.gov/pubs/feds/2002/200227/200227pap.pdf (application/pdf)

Related works:
Chapter: Imperfect Knowledge, Inflation Expectations, and Monetary Policy (2004) Downloads
Working Paper: Imperfect Knowledge, Inflation Expectations, and Monetary Policy (2003) Downloads
Working Paper: Imperfect knowledge, inflation expectations, and monetary policy (2003) Downloads
Working Paper: Imperfect knowledge, inflation expectations, and monetary policy (2002) Downloads
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:fip:fedgfe:2002-27

Ordering information: This working paper can be ordered from
http://www.federalre ... /feds/fedsorder.html

Access Statistics for this paper

More papers in Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (US) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ().

 
Page updated 2019-07-13
Handle: RePEc:fip:fedgfe:2002-27