Is central bank conservatism desirable under learning ?

Marine André and Meixing Dai ()

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Abstract: In a New Keynesian model, we consider the delegation problem of the government when the central bank optimally sets discretionary monetary policy taking account of private expectations formed through adaptive learning. Learning gives rise to an incentive for the central bank to accommodate less the effect of inflation expectations and cost-push shocks on inflation and induces thus a deviation from rational expectations equilibrium. However, discretionary monetary policy under learning suffers from an excessively low stabilization bias. To improve the social welfare, the government should appoint a liberal central banker, i.e., set a negative optimal inflation penalty that decreases with the value of learning coefficient. The main conclusions are valid under both constant- and decreasing-gain learning.

Keywords: Central bank conservatism; Inflation penalty; Adaptive learning; Stabilization bias; Monetary policy delegation (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (6)

Published in Economic Modelling, 2017, 60, pp.281-296. ⟨10.1016/j.econmod.2016.10.002⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02167169

DOI: 10.1016/j.econmod.2016.10.002

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