Optimal Monetary Policy in a Heterogenous Expectations Framework
27 Pages Posted: 12 Jul 2007
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: Suggested Citation
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