Adaptive Learning, Forecast-Based Instrument Rules and Monetary Policy
نویسنده
چکیده
This paper argues that recently popular forecast-based instrument rules for monetary policy may fail to stabilize economic uctuations. In a New Keynesian model of output gap and ination determination in which private agents face multi-period decision problems, but have non-rational expectations and learn over time, if the monetary authority adopts a forecast-based instrument rule and responds to observed private forecasts then this class of policies frequently induce divergent learning dynamics. A central bank that correctly understands private behavior can mitigate such instability by responding to the determinants of private forecasts. This suggests gathering information on the determinants of expectations to be useful. JEL Classi cations: E52, D83, D84
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