Learning and Expectational Stability under Robust Monetary Policy

59 Pages Posted: 30 Sep 2008 Last revised: 9 May 2009

See all articles by Sohei Kaihatsu

Sohei Kaihatsu

Brown University; Bank of Japan

Date Written: May 6, 2009

Abstract

In the last few years, several articles have been devoted to the study of model uncertainty in the New Keynesian model using robust control methods. Most studies have focused on how to design a robust monetary policy to take model uncertainty more seriously. Little attention has, however, been given to expectation formation under such a robust monetary policy. The purpose of this study is to explore the expectational stability under robust monetary policy when private expectations are formed by the adaptive learning technology. We find that the economy is determinate and stable under learning if (i) private agents' expectations are observable to the central bank and appropriately incorporated into its optimal policy rules, and (ii) the central bank's preference for robustness is sufficiently weak. It follows that it is important for the central bank to consider expectational stability when it implements a robust monetary policy.

Keywords: Monetary Policy, Learning, Expectation, Model Uncertainty, Robust Control

JEL Classification: E52, E58, D81

Suggested Citation

Kaihatsu, Sohei, Learning and Expectational Stability under Robust Monetary Policy (May 6, 2009). Available at SSRN: https://ssrn.com/abstract=1268560 or http://dx.doi.org/10.2139/ssrn.1268560

Sohei Kaihatsu (Contact Author)

Brown University ( email )

64 Waterman Street
Providence, RI 02912
United States

HOME PAGE: http://kaihatsu.net/

Bank of Japan ( email )

CPO Box 203
Tokyo, 100-91
Japan

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