Learning about the term structure and optimal rules for inflation targeting

M.F. Tesfaselassie, E. Schaling, S.C.W. Eijffinger

Research output: Contribution to journalArticleScientificpeer-review

Abstract

In this paper, we incorporate the term structure of interest rates in the New Keynesian model and analyze optimal policy under uncertainty about private sector expectations and the degree of inflation persistence. The novel result of our paper is that for large deviations of inflation from its target, the active learning policy is less activist—in the sense of responding less aggressively to the state of the economy—than a myopic policy, which ignores the learning channel. Moreover, for most initial beliefs, the incentive for active learning increases as monetary policy’s leverage over the long-term interest rate increases.
Original languageEnglish
Pages (from-to)1685-1706
JournalJournal of Money, Credit and Banking
Volume43
Issue number8
DOIs
Publication statusPublished - 2011

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