Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/211953 
Authors: 
Year of Publication: 
2003
Series/Report no.: 
Bank of Finland Discussion Papers No. 20/2003
Publisher: 
Bank of Finland, Helsinki
Abstract: 
In this paper we analyse disinflation policy in two environments. In the first, the central bank has perfect knowledge, in the sense that it understands and observes the process by which private sector inflation expectations are generated; in the second, the central bank has to learn the private sector inflation forecasting rule.With imperfect knowledge, results depend on the learning scheme that is employed.Here, the learning scheme we investigate is that of least-squares learning (recursive OLS) using the Kalman filter.A novel feature of a learning-based policy as against the central bank's disinflation policy under perfect knowledge is that the degree of monetary accommodation (the extent to which the central bank accommodates private sector inflation expectations) is no longer constant across the disinflation, but becomes state-dependent.This means that the central bank's behaviour changes during the disinflation as it collects more information.
Subjects: 
learning
rational expectations
separation principle
Kalman filter
time-varying parameters
optimal control
JEL: 
C53
E43
E52
F33
Persistent Identifier of the first edition: 
ISBN: 
952-462-075-8
Document Type: 
Working Paper

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