Optimized Taylor Rules for Disinflation When Agents are Learning

FRB Richmond Working Paper No. 14-07

34 Pages Posted: 2 Apr 2014

See all articles by Timothy Cogley

Timothy Cogley

Leonard N. Stern School of Business - Department of Economics

Christian Matthes

Federal Reserve Bank of Richmond

Argia M. Sbordone

Federal Reserve Bank of New York

Date Written: March 2014

Abstract

Highly volatile transition dynamics can emerge when a central bank disinflates while operating without full transparency. In our model, a central bank commits to a Taylor rule whose form is known but whose coefficients are not. Private agents learn about policy parameters via Bayesian updating. Under McCallumÂ’s (1999) timing protocol, temporarily explosive dynamics can arise, making the transition highly volatile. Locally-unstable dynamics emerge when there is substantial disagreement between actual and perceived feedback parameters. The central bank can achieve low average inflation, but its ability to adjust reaction coefficients is more limited.

Keywords: inflation, monetary policy, learning, policy reforms, transitions

JEL Classification: E31, E52

Suggested Citation

Cogley, Timothy and Matthes, Christian and Sbordone, Argia M., Optimized Taylor Rules for Disinflation When Agents are Learning (March 2014). FRB Richmond Working Paper No. 14-07. Available at SSRN: https://ssrn.com/abstract=2418363 or http://dx.doi.org/10.2139/ssrn.2418363

Timothy Cogley

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

269 Mercer Street
New York, NY 10003
United States
530-752-1581 (Phone)
530-752-9382 (Fax)

Christian Matthes (Contact Author)

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Argia M. Sbordone

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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