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Rule-based monetary policy under central bank learning

Aoki, Kosuke and Nikolov, Kalin (2006) Rule-based monetary policy under central bank learning. In: Clarida, R., Frankel, J., Giavazzi, F. and West, K., (eds.) NBER International Seminar on Macroeconomics 2004. MIT Press, Mass., USA, pp. 145-196. ISBN 9780262532877

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Abstract

The paper evaluates the performance of three popular monetary policy rules when the central bank is learning about the parameter values of a simple New Keynesian model. The three policies are: (1) the optimal non-inertial rule; (2) the optimal history-dependent rule; (3) the optimal price-level targeting rule. Under rational expectations rules (2) and (3) both implement the fully optimal equilibrium by improving the output-ination trade off. When imperfect information about the model parameters is introduced, it is found that the central bank makes monetary policy mistakes, which affect welfare to a different degree under the three rules. The optimal history-dependent rule is worst affected and delivers the lowest welfare. Price level targeting performs best under learning and maintains the advantages of conducting policy under commitment. These ndings are related to the literatures on feedback control and robustness. The paper argues that adopting integral representations of rules designed under full information is desirable because they deliver the benecial output-ination trade-off of commitment policy while being robust to implementation errors.

Item Type: Book Section
Official URL: http://mitpress.mit.edu/
Additional Information: © 2005 Kosuke Aoki and Kalin Nikolov
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
Sets: Collections > Economists Online
Departments > Economics
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 30 Jan 2008
URL: http://eprints.lse.ac.uk/3162/

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