### Abstract

Original language | English |
---|---|

Place of Publication | Tilburg |

Publisher | Macroeconomics |

Number of pages | 35 |

Volume | 2004-14 |

Publication status | Published - 2004 |

### Publication series

Name | CentER Discussion Paper |
---|---|

Volume | 2004-14 |

### Fingerprint

### Keywords

- information
- term structure of interest rates
- least squares
- optimization
- inflation
- forecasting
- learning
- rational expectations
- kalman filter

### Cite this

*Heterogeneous Information about the Term Structure of Interest rates, Least-Squares Learning and Optimal Interest Rate Rules for Inflation Forecast Targeting*. (CentER Discussion Paper; Vol. 2004-14). Tilburg: Macroeconomics.

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**Heterogeneous Information about the Term Structure of Interest rates, Least-Squares Learning and Optimal Interest Rate Rules for Inflation Forecast Targeting.** / Schaling, E.; Eijffinger, S.C.W.; Tesfaselassie, M.F.

Research output: Working paper › Discussion paper › Other research output

TY - UNPB

T1 - Heterogeneous Information about the Term Structure of Interest rates, Least-Squares Learning and Optimal Interest Rate Rules for Inflation Forecast Targeting

AU - Schaling, E.

AU - Eijffinger, S.C.W.

AU - Tesfaselassie, M.F.

N1 - Pagination: 35

PY - 2004

Y1 - 2004

N2 - In this paper we incorporate the term structure of interest rates in a standard inflation forecast targeting framework.Learning about the transmission process of monetary policy is introduced by having heterogeneous agents - i.e. the central bank and private agents - who have different information sets about the future sequence of short-term interest rates.We analyse inflation forecast targeting in two environments.One in which the central bank has perfect knowledge, in the sense that it understands and observes the process by which private sector interest rate expectations are generated, and one in which the central bank has imperfect knowledge and has to learn the private sector forecasting rule for short-term interest rates.In the case of imperfect knowledge, the central bank has to learn about private sector interest rate expectations, as the latter affect the impact of monetary policy through the expectations theory of the term structure of interest rates.Here following Evans and Honkapohja (2001), the learning scheme we investigate is that of least-squares learning (recursive OLS) using the Kalman filter.We find that optimal monetary policy under learning is a policy that separates estimation and control.Therefore, this model suggests that the practical relevance of the breakdown of the separation principle and the need for experimentation in policy may be limited.

AB - In this paper we incorporate the term structure of interest rates in a standard inflation forecast targeting framework.Learning about the transmission process of monetary policy is introduced by having heterogeneous agents - i.e. the central bank and private agents - who have different information sets about the future sequence of short-term interest rates.We analyse inflation forecast targeting in two environments.One in which the central bank has perfect knowledge, in the sense that it understands and observes the process by which private sector interest rate expectations are generated, and one in which the central bank has imperfect knowledge and has to learn the private sector forecasting rule for short-term interest rates.In the case of imperfect knowledge, the central bank has to learn about private sector interest rate expectations, as the latter affect the impact of monetary policy through the expectations theory of the term structure of interest rates.Here following Evans and Honkapohja (2001), the learning scheme we investigate is that of least-squares learning (recursive OLS) using the Kalman filter.We find that optimal monetary policy under learning is a policy that separates estimation and control.Therefore, this model suggests that the practical relevance of the breakdown of the separation principle and the need for experimentation in policy may be limited.

KW - information

KW - term structure of interest rates

KW - least squares

KW - optimization

KW - inflation

KW - forecasting

KW - learning

KW - rational expectations

KW - kalman filter

M3 - Discussion paper

VL - 2004-14

T3 - CentER Discussion Paper

BT - Heterogeneous Information about the Term Structure of Interest rates, Least-Squares Learning and Optimal Interest Rate Rules for Inflation Forecast Targeting

PB - Macroeconomics

CY - Tilburg

ER -