Optimal Monetary Policy When Agents are Learning

48 Pages Posted: 9 Jul 2010

See all articles by Kristina Molnar

Kristina Molnar

Norwegian School of Economics (NHH)

Sergio Santoro

Universitat Pompeu Fabra

Date Written: May 27, 2010

Abstract

We derive the optimal monetary policy in a sticky price model when private agents follow adaptive learning. We show that this slight departure from rationality has important implications for policy design. The central bank faces a new intertemporal trade-off, not present under rational expectations: it is optimal to forego stabilizing the economy in the present in order to facilitate private sector learning and thus ease the future intratemporal inflation-output gap trade-offs. The policy recommendation is robust: the welfare loss entailed by the optimal policy under learning if the private sector actually has rational expectations is much smaller than if the central bank mistakenly assumes rational expectations when in fact agents are learning.

Keywords: Optimal Monetary Policy, Learning, Rational Expectations

JEL Classification: C62, D83, D84, E52

Suggested Citation

Molnar, Kristina and Santoro, Sergio, Optimal Monetary Policy When Agents are Learning (May 27, 2010). Norges Bank Working Paper No. 2010/08, Available at SSRN: https://ssrn.com/abstract=1636720 or http://dx.doi.org/10.2139/ssrn.1636720

Kristina Molnar (Contact Author)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

Sergio Santoro

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas 25-27
08005 Barcelona
Spain

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