Optimized Taylor Rules for Disinflation When Agents are Learning
FRB Richmond Working Paper No. 14-07
34 Pages Posted: 2 Apr 2014
Date Written: March 2014
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 McCallums (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: Suggested Citation