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Title:Optimal monetary policy when agents are learning PDF Logo
Authors:Molnár, Krisztina
Santoro, Sergio
Issue Date:2010
Series/Report no.:CESifo working paper Monetary Policy and International Finance 3072
Abstract:We derive the optimal monetary policy in a sticky price model when private agents follow adaptive learning. We show that this slight departure from rationality has important implications for policy design. The central bank faces a new intertemporal trade-off, not present under rational expectations: it is optimal to forego stabilizing the economy in the present in order to facilitate private sector learning and thus ease the future intratemporal inflation-output gap trade-offs. The policy recommendation is robust: the welfare loss entailed by the optimal policy under learning if the private sector actually has rational expectations is much smaller than if the central bank mistakenly assumes rational expectations when in fact agents are learning.
Subjects:optimal monetary policy
learning
rational expectations
JEL:C62
D83
D84
E52
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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