Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/184680 
Authors: 
Year of Publication: 
2018
Series/Report no.: 
BERG Working Paper Series No. 139
Publisher: 
Bamberg University, Bamberg Economic Research Group (BERG), Bamberg
Abstract: 
In this paper, I propose an optimal interest rate rule under heterogeneous expectations derived from a welfare criterion that is a second-order approximation of heterogeneous household utility following Di Bartolomeo et al. (2016). Additionally, I explore the agent level of the Branch and McGough (2009) framework in a more detailed fashion which is important as the central bank's welfare criterion depends on consumption inequality. I find that the consumption decision of "rational" agents in Di Bartolomeo et al. (2016) is inconsistent with the higher-order beliefs assumption of Branch and McGough (2009). Hence, consumption rules are derived that are consistent with the micro-foundations of Branch and McGough (2009) including a possible specification of agent's long-run beliefs. Further, the welfare analysis shows that the optimal interest rate rule yields welfare gains that range between 0.1 and 7.1 percent under the considered parameter values relative to a rule that is optimized under a conventional inflation-targeting objective as in Gasteiger (2014). Welfare gains are high when the underlying economy features a high degree of heterogeneity.
Subjects: 
optimal monetary policy
policy implementation
heterogeneous expectations
inequality
JEL: 
E52
D84
ISBN: 
978-3-943153-60-6
Document Type: 
Working Paper

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