Robustifying Learnability

Abstract

A treatment of policy design for learnability in worlds where agents have potentially misspecified their learning models has yet to surface. This paper provides such a treatment. We begin with the notion that because the profession has yet to settle on a consensus model of the economy, it is unreasonable to expect private agents to have collective rational expectations. We assume that agents have only an approximate understanding of the workings of the economy and that their learning the reduced forms of the economy is subject to potentially destabilizing perturbations. The issue is then whether a central bank can design policy to account for perturbations and still assure the learnability of the model. We provide two examples one of which -- the canonical New Keynesian business cycle model -- serves as a test case. For different parameterizations of a given policy rule, we use structured singular value analysis (from robust control theory) to find the largest ranges of misspecifications that can be tolerated in a learning model without compromising convergence to an REE.

In addition, we study the cost, in terms of performance in the steady state of a central bank that acts to robustify learnability on the transition path to REE. (Note: This paper contains full-color graphics)

Keywords: monetary policy, learning, E-stability, learnability, robust control

JEL Classification: C6, E4, E5