Optimal Monetary Policy under Heterogeneous Expectations

Orlando Gomes

Macroeconomics from University Library of Munich, Germany

Abstract: Monetary policy has an important role in the determination of the inflation rate and the output gap time trajectories. Monetary authorities should choose the nominal interest rate time path that best serves the goals of price stability (primarily) and output growth (as a consequence of the first). In this paper it is presented a framework under which an optimal interest rate rule is computed, and this rule is found to be stabilizing. The stability result is true for a homogeneous expectations scenario, where all individuals believe that inflation converges to a long run low level. Introducing expectations heterogeneity under a bounded rationality – discrete choice setup, this result continues to hold, but now we cannot exclude periods of strong price instability that, nevertheless, do not tend to persist for long periods of time.

Keywords: Optimal monetary policy; Price stability; Inflation targeting; Heterogeneous expectations; Bounded rationality; Discrete choice (search for similar items in EconPapers)
JEL-codes: E43 E52 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2004-09-28
New Economics Papers: this item is included in nep-cba, nep-dcm, nep-mac and nep-mon
Note: Type of Document - pdf; pages: 32
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpma:0409023

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