Benefits from U.S. Monetary Policy Experimentation in the Days of Samuelson and Solow and Lucas

34 Pages Posted: 15 Sep 2008

See all articles by Timothy Cogley

Timothy Cogley

Leonard N. Stern School of Business - Department of Economics

Ric Colacito

University of North Carolina Kenan-Flagler Business School; NBER

Thomas J. Sargent

New York University (NYU) - Department of Economics, Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)

Date Written: September, 11 2008

Abstract

A policy maker knows two models of inflation-unemployment dynamics. One implies an exploitable trade-off. The other does not. The policy maker's prior probability over the two models is part of his state vector. Bayes law converts the prior into a posterior at each date and gives the policy maker an incentive to experiment. For a model calibrated to U.S. data through the early 1960s, we isolate the component of government policy that is due to experimentation by comparing the outcomes from two Bellman equations, the first of which embodies a `experiment and learn' setup, the second of which embodies a `don't experiment, do learn' view. We interpret the second as an example of an `anticipated utility' model and study how well its outcomes approximate those from the `experiment and learn' Bellman equation.

Suggested Citation

Cogley, Timothy and Colacito, Riccardo and Sargent, Thomas J., Benefits from U.S. Monetary Policy Experimentation in the Days of Samuelson and Solow and Lucas (September, 11 2008). Journal of Money, Credit, and Banking, Vol. 39, No. 2, 2007, Available at SSRN: https://ssrn.com/abstract=1267034

Timothy Cogley

Leonard N. Stern School of Business - Department of Economics ( email )

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Riccardo Colacito (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://drric.web.unc.edu/

NBER ( email )

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Thomas J. Sargent

New York University (NYU) - Department of Economics, Leonard N. Stern School of Business ( email )

269 Mercer Street
New York, NY 10003
United States
212-998-3548 (Phone)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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