Is central bank conservatism desirable under learning?

André, Marine; Dai, Meixing

doi:10.1016/j.econmod.2016.10.002

Cited by 6 publications

(4 citation statements)

References 41 publications

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“…It can be substituted by various learning behaviors investigated in the literature. 16 One immediate extension to our model is to consider that private agents use a decreasing-gain algorithm as in Molnár and Santoro (2014) and André and Dai (2017), and examine how the robust control approach could affect the effect of decreasing-gain learning on optimal monetary policy. 17 We can state with confidence that since the learning gain decreases with time, the temporary equilibria under decreasing-gain learning replicate more or less those under constant-gain learning with given learning gains.…”

Section: Discussionmentioning

confidence: 99%

Learning, robust monetary policy and the merit of precaution

André

Dai

2018

The B.E. Journal of Macroeconomics

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We study in a New Keynesian framework the consequences of adaptive learning for the design of robust monetary policy. Compared to rational expectations, the fact that private sector follows adaptive learning gives the central bank an additional intertemporal trade-off between optimal behavior in the present and in later periods thanks to its ability to manipulate future inflation expectations. We show that adaptive learning imposes a more restrictive constraint on monetary policy robustness to ensure the dynamic stability of the equilibrium than under rational expectations but strengthens the argument in favor of a more aggressive monetary policy when the central bank fears for model misspecifications.

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Section: Discussionmentioning

confidence: 99%

Learning, robust monetary policy and the merit of precaution

André

Dai

2018

The B.E. Journal of Macroeconomics

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“…Our paper contributes to a large and growing learning literature, of which most has focused on evaluating the robustness of RE policy prescriptions to learning dynamics. 3 It shares with a number of studies in the monetary policy literature the assumption of adaptive learning. When policy is conducted through exogenous Taylor rules, adaptive learning helps selecting among all possible equilibria obtained under RE, and in this sense it can be viewed as a process that converges towards RE equilibrium (…”

Section: Introductionmentioning

confidence: 98%

“…However, learning may generate inflation persistence, which is suboptimal, during the transition to the steady-state equilibrium compared to the equilibrium under discretion and RE. According to André and Dai (2017), to deal with this, the CB should be less conservative in the sense of Rogoff (1985) than society, under discretionary monetary policy. André and Dai (2018) examine in a closed economy the design of optimal robust monetary policy when private agents are learning, and find that learning significantly limits the possibility for the CB to conduct robust policy compared to RE.…”

Section: Introductionmentioning

confidence: 99%

The limits to robust monetary policy in a small open economy with learning agents

André¹,

Dai²

2020

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We study the impact of adaptive learning for the design of a robust monetary policy using a small open-economy New Keynesian model. We find that slightly departing from rational expectations substantially changes the way the central bank deals with model misspecification. Learning induces an intertemporal trade-off for the central bank, i.e., stabilizing inflation (output gap) today or stabilizing it tomorrow. The central bank should optimally anchoring private agents expectations in the short term in exchange of easier future intratemporal trade-offs. Compared to the rational expectations equilibrium, the possibility to conduct robust monetary policy is limited in a small open economy under learning for any exchange rate pass-through level and any degree of trade openness. The misspecification that can be introduced into all equations of the model is lower in a small open economy, and approaches zero at high speed as the learning gain rises.

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“…2 The model is calibrated for Mexico as it is a representative small open emerging economy, with a GDP nine times smaller than its major trading partner, with a dynamic exporting sector, a floating exchange rate and an inflation-targeting regime (Elizondo and Carrillo 2015). 3 We study how optimal monetary policy should behave when considering model uncertainty, that is, when the model departs from its benchmark. Therefore, we analyze four different scenarios: (1) uncertainty arising from the entire model with the same misspecification in all equations; (2) concerns about only the specification of the New Keynesian Phillips curve; (3) uncertainty only when modelling the IS curve; and (4) uncertainty arising from the uncovered interest rate parity (UIP).…”

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confidence: 99%

Optimal robust monetary policy in a small open economy

Marine¹,

Espidio²

2022

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En este documento estudiamos una política monetaria óptima y robusta para una economía pequeña y abierta. El enfoque de control robusto supone que los agentes económicos no pueden asignar probabilidades a un conjunto de modelos factibles; por lo tanto, se enfoca en la peor especificación posible de un modelo de referencia. Nuestros resultados sugieren que la implementación de una política monetaria óptima y globalmente robusta es limitada, debido a que las desviaciones del modelo de referencia conducen a múltiples equilibrios. Segundo, cuando el banco central considera incertidumbre exclusivamente en la curva IS o en la condición UIP, el espacio de soluciones únicas se expande. Así, el banco central reacciona de manera más agresiva a choques de demanda o de tipo de cambio real cuando es robusto a errores de especificación en la curva IS. Finalmente, encontramos que la política monetaria robusta está restringida por la persistencia de la inflación y el bajo traspaso del tipo de cambio a los precios. Destaca la importancia de anclar las expectativas de inflación.

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Is central bank conservatism desirable under learning?

Cited by 6 publications

References 41 publications

Learning, robust monetary policy and the merit of precaution

Learning, robust monetary policy and the merit of precaution

The limits to robust monetary policy in a small open economy with learning agents

Optimal robust monetary policy in a small open economy

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