On the perils of stabilizing prices when agents are learning

Antonio Mele, Krisztina Molnar and Sergio Santoro

No 1/2015, Discussion Paper Series in Economics from Norwegian School of Economics, Department of Economics

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 confi dence, since agents update expectations sluggishly. In the long run agents learn the policy implemented, and the economy converges to a rational expectations equilibrium in which policy does not stabilize prices, economic volatility is high, and agents su ffer the corresponding welfare losses. However, these losses are outweighed by short term gains from the learning phase.

Keywords: Price level stabilization; expectations. (search for similar items in EconPapers)
JEL-codes: C62 D83 D84 E52 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2014-12-19
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (4)

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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 (2015)
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