TY - JOUR
T1 - Learning about the term structure and optimal rules for inflation targeting
AU - Tesfaselassie, M.F.
AU - Schaling, E.
AU - Eijffinger, S.C.W.
N1 - Appeared earlier as CentER DP 2006-088
PY - 2011
Y1 - 2011
N2 - 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.
AB - 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.
U2 - 10.1111/j.1538-4616.2011.00463.x
DO - 10.1111/j.1538-4616.2011.00463.x
M3 - Article
VL - 43
SP - 1685
EP - 1706
JO - Journal of Money, Credit and Banking
JF - Journal of Money, Credit and Banking
SN - 0022-2879
IS - 8
ER -