Some Implications of Learning for Price Stability

30 Pages Posted: 19 Jan 2017

See all articles by Stefano Eusepi

Stefano Eusepi

University of Texas at Austin

Marc P. Giannoni

Barclays Corporate and Investment Bank; Center for Economic Policy Research (CEPR)

Bruce Preston

University of Melbourne - Department of Economics

Date Written: January 14, 2017

Abstract

Survey data on expectations of a range of macroeconomic variables exhibit low-frequency drift. In a New Keynesian model consistent with these empirical properties, optimal policy in general delivers a positive inflation rate in the long run. Two special cases deliver classic outcomes under rational expectations: as the degree of low-frequency variation in beliefs goes to zero, the long-run inflation rate coincides with the inflation bias under optimal discretion; for non-zero low-frequency drift in beliefs, as households become highly patient valuing utility in any period equally, the optimal long-run inflation rate coincides with optimal commitment ― price stability is optimal.

Keywords: Optimal Monetary Policy, Learning Dynamics, Price Stability

JEL Classification: E32, D83, D84

Suggested Citation

Eusepi, Stefano and Giannoni, Marc P. and Preston, Bruce, Some Implications of Learning for Price Stability (January 14, 2017). CAMA Working Paper No. 8/2017 , Available at SSRN: https://ssrn.com/abstract=2901751 or http://dx.doi.org/10.2139/ssrn.2901751

Stefano Eusepi

University of Texas at Austin ( email )

2317 Speedway
Austin, TX Texas 78712
United States

Marc P. Giannoni

Barclays Corporate and Investment Bank ( email )

745 7th Avenue
New York, NY 10019
United States

Center for Economic Policy Research (CEPR)

90-98 Goswell Road
London, EC1V 7RR
United Kingdom

Bruce Preston (Contact Author)

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

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