Optimal Monetary Policy in a Heterogenous Expectations Framework

27 Pages Posted: 12 Jul 2007

See all articles by Ricardo Cavaco Nunes

Ricardo Cavaco Nunes

Federal Reserve Banks - Federal Reserve Bank of Boston

Date Written: September 2005

Abstract

We consider a heterogenous expectations model where some agents are adaptive learners while others are rational. We consider three optimal monetary policy rules when the central bank either does not influence expectations or does influence expectations of learners or does influence expectations of learners and rational agents. We analyze a disinflation episode since this is a relevant policy setting to compare our rules. We find that there are non-negligible benefits from actively influencing expectations. Finally, we consider that the central bank may have wrong beliefs about the proportion of learners in the economy. We also find that these rules are safe to implement even when the central bank has misspecified beliefs.

Keywords: Optimal Monetary Policy; Adaptive Learning; Disinflation

JEL Classification: E31, E52, D84

Suggested Citation

Nunes, Ricardo Cavaco, Optimal Monetary Policy in a Heterogenous Expectations Framework (September 2005). Available at SSRN: https://ssrn.com/abstract=998543 or http://dx.doi.org/10.2139/ssrn.998543

Ricardo Cavaco Nunes (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

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