Monetary policy, learning and the speed of convergence

Ferrero, Giuseppe

doi:10.1016/j.jedc.2006.10.003

Cited by 162 publications

(33 citation statements)

References 23 publications

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“…As increases, and policy becomes more aggressive, these feedback e¤ects decline until they are reversed: an increase in in ‡ation expectations is met by a decline in actual in ‡ation. This is the key insight of papers by Bom…m, Tetlow, von zur Muehlen, and Williams (1997), Orphanides and Williams (2005a, 2005c and Ferrero (2007). Optimal monetary policy in this class of rule prescribes the central bank to be more conservative than it would be under rational expectations, to respond more aggressively to in ‡ation and in ‡ation expectations.…”

Section: Optimal Simple Rulesmentioning

confidence: 92%

“…Using the Euler equation approach Ferrero (2007) characterizes the set of adjusted-learning-speed parameters, ALS ; that are consistent with both asymptotic convergence to optimal discretion policy under rational expectations and a further requirement that learning is suitably quick.…”

Section: Optimal Simple Rulesmentioning

confidence: 93%

“…The time-varying drifts eventually vanish as agents learn the rational expectations equilibrium. However, as discussed in Tetlow and von zur Muehlen (2001) and Ferrero (2007), policy plays a key role in determining the speed of convergence of the learning process. A targeting rule with an aggressive response to in ‡ation implies fast convergence to rational expectations.…”

Section: Optimal Simple Rulesmentioning

confidence: 99%

“…Orphanides and Williams (2005) and Ferrero (2007) emphasize monetary policy rules that respond to expected in ‡ation have powerful stabilizing properties. Using the Euler equation approach Ferrero (2007) characterizes the set of adjusted-learning-speed parameters, ALS ; that are consistent with both asymptotic convergence to optimal discretion policy under rational expectations and a further requirement that learning is suitably quick.…”

Section: Optimal Simple Rulesmentioning

confidence: 99%

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The Science of Monetary Policy: An Imperfect Knowledge Perspective

Preston

Eusepi

2016

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. "I think of economics as studying decision rules that are steady states of some adaptive process, decision rules that are found to work over a range of situations and hence are no longer revised appreciably as more experience accumulates." Robert E. Lucas Jr "Rational expectations imposes two requirements on economic models: individual rationality and mutual consistency of perception about the environment. [...] I interpret a proposal to build models with 'boundedly rational'agents as a call to retreat from the second piece of rational expectations (mutual consistency of perceptions) by expelling rational agents from our model's environment and replacing them with 'arti…cially intelligent' agents who behave like econometricians." Terms of use: Documents inThomas Sargent "The traditional rational-expectations model of in ‡ation and in ‡ation expectations has been a useful workhorse for thinking about issues of credibility and institutional design, but, to my mind, it is less helpful for thinking about economies in which (1) the structure of the economy is constantly evolving in ways that are imperfectly understood by both the public and policymakers and (2) the policymakers'objective function is not fully known by private agents. In particular, together with the assumption that the central bank's objective function is …xed and known to the public, the traditional rational-expectations approach implies that the public has …rm knowledge of the long-run equilibrium in ‡ation rate; consequently, their long-run in ‡ation expectations do not vary over time in response to new information."Ben S. BernankeThe authors thank Jim Bullard, Marc Giannoni and Mike Woodford for on-going discussions about much of the material contained here-in, and also a number of anonymous referees and the editors Janet Currie and Steven Durlauf for constructive feedback.

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Section: Optimal Simple Rulesmentioning

confidence: 92%

Section: Optimal Simple Rulesmentioning

confidence: 93%

Section: Optimal Simple Rulesmentioning

confidence: 99%

Section: Optimal Simple Rulesmentioning

confidence: 99%

See 2 more Smart Citations

The Science of Monetary Policy: An Imperfect Knowledge Perspective

Preston

Eusepi

2016

SSRN Journal

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“…The main papers are Orphanides and Williams (2005b), Molnar and Santoro (2006), Gaspar, Smets, and Vestin (2006), Gaspar, Smets, and Vestin (2005) and Orphanides and Williams (2007). A related issue studied by Ferrero (2007) concerns speed of convergence of learning for alternative policy rules. Arifovic, Bullard, and Kostyshyna (2007) consider the implications of social learning for monetary policy rules.…”

Section: Further Developmentsmentioning

confidence: 99%

Expectations, Learning and Monetary Policy: An Overview of Recent Research

Evans

Honkapohja

2008

SSRN Journal

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Expectations about the future are central for determination of current macroeconomic outcomes and the formulation of monetary policy. Recent literature has explored ways for supplementing the benchmark of rational expectations with explicit models of expectations formation that rely on econometric learning. Some apparently natural policy rules turn out to imply expectational instability of private agents' learning. We use the standard New Keynesian model to illustrate this problem and survey the key results about interest-rate rules that deliver both uniqueness and stability of equilibrium under econometric learning. We then consider some practical concerns such as measurement errors in private expectations, observability of variables and learning of structural parameters required for policy. We also discuss some recent applications including policy design under perpetual learning, estimated models with learning, recurrent hyperinflations, and macroeconomic policy to combat liquidity traps and deflation.

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