Simplicity versus Optimality: The Choice of Monetary Policy Rules when Agents Must Learn
36 Pages Posted: 18 Dec 2018 Last revised: 18 Jul 2022
There are 2 versions of this paper
Simplicity versus Optimality: The Choice of Monetary Policy Rules when Agents Must Learn
Simplicity Versus Optimality: The Choice of Monetary Policy Rules When Agents Must Learn
Date Written: February 1, 2001
Abstract
The normal assumption of full information is dropped and the choice of monetary policy rules is instead examined when private agents must learn the rule. A small, forward-looking model is estimated and stochastic simulations conducted with agents using discounted least squares to learn of a change of preferences or a switch to a more complex rule. We "nd that the costs of learning a new rule may be substantial, depending on preferences and the rule that is initially in place. Policymakers with strong preferences for inflation control incur substantial costs when they change the rule in use, but are nearly always willing to bear the costs. Policymakers with weak preferences for inflation control may actually benefit from agents' prior belief that a strong rule is in place.
Keywords: Monetary policy; Learning
JEL Classification: C5,C6,E5
Suggested Citation: Suggested Citation