On the Perils of Stabilizing Prices When Agents are Learning.

55 Pages Posted: 23 Jan 2015

See all articles by Antonio Mele

Antonio Mele

University of Surrey

Krisztina Molnar

Norwegian School of Economics (NHH) - Department of Economics

Sergio Santoro

Bank of Italy

Multiple version iconThere are 3 versions of this paper

Date Written: December 19, 2014

Abstract

We show that price level stabilization is not optimal in an economy where agents have incomplete knowledge about the policy implemented and try to learn it. A systematically more accommodative policy than what agents expect generates short term gains without triggering an abrupt loss of confidence, since agents update expectations sluggishly. In the long run agents learn the policy implemented, and the economy converges to a rational expectations equilibrium in which policy does not stabilize prices, economic volatility is high, and agents suffer the corresponding welfare losses. However, these losses are outweighed by short term gains from the learning phase.

JEL Classification: C62, D83, D84, E52.

Suggested Citation

Mele, Antonio and Molnar, Krisztina and Santoro, Sergio, On the Perils of Stabilizing Prices When Agents are Learning. (December 19, 2014). NHH Dept. of Economics Discussion Paper No. 01/2015. Available at SSRN: https://ssrn.com/abstract=2553827 or http://dx.doi.org/10.2139/ssrn.2553827

Antonio Mele

University of Surrey ( email )

Guildford
Guildford, Surrey GU2 5XH
United Kingdom

Krisztina Molnar (Contact Author)

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

Sergio Santoro

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Register to save articles to
your library

Register

Paper statistics

Downloads
35
Abstract Views
325
PlumX Metrics
!

Under construction: SSRN citations while be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information