Rule-Based Monetary Policy Under Central Bank Learning

40 Pages Posted: 3 Aug 2005

See all articles by Kosuke Aoki

Kosuke Aoki

University of Tokyo

Kalin Nikolov

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2005


The paper evaluates the performance of three popular monetary policy rules when 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, it is found that 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 literatures on feedback control and robustness. The paper argues that adopting integral representations of rules designed under full information is desirable because they deliver the beneficial output-inflation trade-off of commitment policy while being robust to implementation errors.

Keywords: Monetary policy rules, learning

JEL Classification: E31, E50

Suggested Citation

Aoki, Kosuke and Nikolov, Kalin, Rule-Based Monetary Policy Under Central Bank Learning (May 2005). CEPR Discussion Paper No. 5056, Available at SSRN:

Kosuke Aoki (Contact Author)

University of Tokyo ( email )

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

Kalin Nikolov

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

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