The Science of Monetary Policy: An Imperfect Knowledge Perspective

73 Pages Posted: 6 Jul 2016 Last revised: 30 Aug 2017

See all articles by Stefano Eusepi

Stefano Eusepi

University of Texas at Austin

Bruce Preston

University of Melbourne - Department of Economics

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Date Written: 2016-06-01

Abstract

New Keynesian theory identifies a set of principles central to the design and implementation of monetary policy. These principles rely on the ability of a central bank to manage expectations precisely, with policy prescriptions typically derived under the assumption of perfect information and full rationality. However, the challenging macroeconomic environment bequeathed by the financial crisis has led many to question the efficacy of monetary policy, and, particularly, to question whether central banks can influence expectations with as much control as previously thought. In this paper, we survey the literature on monetary policy design under imperfect knowledge and asses to what degree its policy prescriptions deviate from the rational expectations benchmark.

Keywords: monetary policy, expectations formation, learning

JEL Classification: E31, E32, E52

Suggested Citation

Eusepi, Stefano and Preston, Bruce, The Science of Monetary Policy: An Imperfect Knowledge Perspective (2016-06-01). FRB of NY Staff Report No. 782, Available at SSRN: https://ssrn.com/abstract=2803866

Stefano Eusepi (Contact Author)

University of Texas at Austin ( email )

2317 Speedway
Austin, TX Texas 78712
United States

Bruce Preston

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

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