Rule-Based Monetary Policy Under Central Bank Learning

Bank of England Working Paper No. 235

42 Pages Posted: 21 Feb 2005

See all articles by Kalin Nikolov

Kalin Nikolov

European Central Bank (ECB)

Kosuke Aoki

University of Tokyo

Multiple version iconThere are 2 versions of this paper

Date Written: October 2004


This paper evaluates the performance of three popular monetary policy rules where the central bank is learning about the parameter values of a simple New Keynesian model. The three policies are: (1) the optimal non-inertial rule; (2) the optimal history-dependent rule; (3) the optimal price level targeting rule. Under rational expectations rules (2) and (3) both implement the fully optimal equilibrium by improving the output/inflation trade-off. When imperfect information about the model parameters is introduced, the central bank makes monetary policy mistakes, which affect welfare to a different degree under the three rules. The optimal history-dependent rule is worst affected and delivers the lowest welfare. Price level targeting performs best under learning and maintains the advantages of conducting policy under commitment. These findings are related to the literature on feedback control and robustness. The paper argues that adopting integral representations of rules designed under full information is desirable, because these rules deliver the beneficial output/inflation trade-off of commitment policy, while being robust to implementation errors.

Keywords: Monetary policy, learning

JEL Classification: E31, E52

Suggested Citation

Nikolov, Kalin and Aoki, Kosuke, Rule-Based Monetary Policy Under Central Bank Learning (October 2004). Bank of England Working Paper No. 235, Available at SSRN: or

Kalin Nikolov (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

Kosuke Aoki

University of Tokyo ( email )

Hongo 7-3-1
Tokyo, Tokyo 113-0033

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