Hostname: page-component-78c5997874-m6dg7 Total loading time: 0 Render date: 2024-11-14T09:30:29.020Z Has data issue: false hasContentIssue false
  • English
  • Français

LEARNING THE INFLATION TARGET

Published online by Cambridge University Press:  01 April 2009

Ricardo Nunes
Ricardo Nunes*
Affiliation:
Federal Reserve Board
*
Address correspondence to: Ricardo Nunes, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW, Washington, DC 20551, USA; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

We propose a framework in which expectations have a rational and a learning component. We describe a solution method for these frameworks and provide an application to the Volcker disinflation with the New Keynesian model. Although the model with rational expectations does not seem to account for this episode, results improve when a small and empirically plausible proportion of private agents are learning. The learning component is argued to be more robust and plausible than the rule-of-thumb expectations present in the hybrid Phillips curve.

Keywords

Adaptive LearningHeterogeneityVolcker Disinflation
Type
Articles
Information
Macroeconomic Dynamics , Volume 13 , Issue 2 , April 2009 , pp. 167 - 188
Copyright
Copyright © Cambridge University Press 2009

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Adam, K. and Padula, M. (2003) Inflation Dynamics and Subjective Expectations in the United States. Working paper, European Central Bank.CrossRefGoogle Scholar
Andolfatto, D. and Gomme, P. (2003) Monetary policy regimes and beliefs. International Economic Review 44 (1), 1–30.CrossRefGoogle Scholar
Ball, L. (1994) What determines the sacrifice ratio? In Mankiw, N.G. (ed.), Monetary Policy, pp. 155–182. Chicago: University of Chicago Press.Google Scholar
Ball, L. (1995) Disinflation and imperfect credibility. Journal of Monetary Economics 35, 5–24.CrossRefGoogle Scholar
Baxter, M. and King, R. (1999) Measuring business cycles: Approximate band-pass filters for economic time series. Review of Economics and Statistics 81 (4), 575–593.CrossRefGoogle Scholar
Blanchard, O.J. and Kahn, C.M. (1980) The solution of linear difference models under rational expectations. Econometrica 48, 1305–1316.CrossRefGoogle Scholar
Branch, W. and Evans, C. (2006) A simple recursive forecasting model. Economics Letters 91, 158–166.CrossRefGoogle Scholar
Bullard, J. and Eusepi, S. (2005) Did the great inflation occur despite policymaker commitment to a Taylor rule? Review of Economic Dynamics 8, 324–359.CrossRefGoogle Scholar
Bullard, J. and Mitra, K. (2002) Learning about monetary policy rules. Journal of Monetary Economics 49, 1105–1129.CrossRefGoogle Scholar
Calvo, G. (1983) Staggered prices in a utility maximizing framework. Journal of Monetary Economics 12, 383–398.CrossRefGoogle Scholar
Carroll, C. (2003) Macroeconomic expectations of households and professional forecasters. Quarterly Journal of Economics 118 (1), 269–298.CrossRefGoogle Scholar
Clarida, R., Galí, J. and Gertler, M. (1999) The science of monetary policy: A new Keynesian perspective. Journal of Economic Literature 37 (4), 1661–1707.CrossRefGoogle Scholar
Erceg, C.J. and Levin, A.T. (2003) Imperfect credibility and inflation persistence. Journal of Monetary Economics 50, 915–944.CrossRefGoogle Scholar
Evans, G. and Honkapohja, S. (1998) Economic dynamics with learning: New stability results. Review of Economic Studies 65, 23–44.CrossRefGoogle Scholar
Evans, G. and Honkapohja, S. (2001) Learning and Expectations in Macroeconomics. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Evans, G. and Honkapohja, S. (2003) Expectations and the stability problem for optimal monetary policies. Review of Economic Studies 70, 807–824.CrossRefGoogle Scholar
Evans, G., Hokapohja, S., and Sargent, T.J. (1993) On the preservation of deterministic cycles when some agents perceive them to be random fluctuations. Journal of Economic Dynamics and Control 17, 705–721.CrossRefGoogle Scholar
Ferrero, G. (2007) Monetary policy, learning and the speed of convergence. Journal of Economic Dynamics and Control 31 (9), 3006–3041.CrossRefGoogle Scholar
Fuhrer, J. (1997) The (un)importance of forward looking behavior in price specifications. Journal of Money, Credit, and Banking 29 (3), 338–350.CrossRefGoogle Scholar
Fuhrer, J. and Moore, G. (1995) Inflation persistence. Quarterly Journal of Economics 110 (1), 127–159.CrossRefGoogle Scholar
Galí, J. (2007) Monetary Policy, Inflation and the Business Cycle. Princeton, NJ: Princeton University Press, forthcoming.Google Scholar
Galí, J. and Gertler, M. (1999) Inflation dynamics: A structural econometric analysis. Journal of Monetary Economics 44, 195–222.CrossRefGoogle Scholar
Galí, J., Gertler, M. and López-Salido, J.D. (2005) Robustness of the estimates of the hybrid new Keynesian Phillips curve. Journal of Monetary Economics 52, 1107–1118.CrossRefGoogle Scholar
Giannitsarou, C. (2003) Heterogeneous learning. Review of Economic Dynamics 6, 885–906.CrossRefGoogle Scholar
Giannitsarou, C. (2006) Supply-side reforms and learning dynamics. Journal of Monetary Economics 53, 231–306.CrossRefGoogle Scholar
Kozicki, S. and Tinsley, P.A. (2002) Alternative Sources of the Lag Dynamics of Inflation. Working Paper, Federal Reserve Bank of Kansas City.CrossRefGoogle Scholar
Linde, J. (2005) Estimating new-Keynesian Phillips curves: A full information maximum likelihood approach. Journal of Monetary Economics 52, 1135–1149.CrossRefGoogle Scholar
Lorenzoni, G. and Marcet, A. (1999) Parameterized expectations approach. Some practical issues. In Marimon, R. and Scott, A. (eds.), Computational Methods for the Study of Dynamic Economies. pp. 143–171. Oxford, UK: Oxford University Press.Google Scholar
Mankiw, N.G. and Reis, R. (2002) Sticky information versus sticky prices: A proposal to replace the new Keynesian Phillips curve. Quarterly Journal of Economics 117 (4), 1295–1328.CrossRefGoogle Scholar
Marcet, A. and Marimon, R. (1992) Communication, commitment and growth. Journal of Economic Theory 58 (2), 219–249.CrossRefGoogle Scholar
Marcet, A. and Nicolini, J. (2003) Recurrent hyperinflations and learning. American Economic Review 93 (5), 1476–1498.CrossRefGoogle Scholar
Marcet, A. and Sargent, T. (1989) Convergence of least-squares learning mechanisms in self-referential linear stochastic models. Journal of Economic Theory 48, 337–368.CrossRefGoogle Scholar
McCallum, B. (1983) On nonuniqueness in rational expectations models: An attempt at perspective. Journal of Monetary Economics 11, 139–168.CrossRefGoogle Scholar
Milani, F. (2005) Adaptive Learning and Inflation Persistence. Manuscript, University of California Irvine.CrossRefGoogle Scholar
Molnar, K. (2004) Learning with Expert Advice. Mimeo, Universitat Pompeu Fabra.Google Scholar
Nunes, R.C. (2005) Inflation Dynamics: The Role of Expectations. Working paper, SSRN.CrossRefGoogle Scholar
Orphanides, A. and Williams, J. (2005) Expectations, learning and monetary policy. Journal of Economic Dynamics and Control 29 (11), 1807.CrossRefGoogle Scholar
Orphanides, A. and Williams, J. (2006) Monetary policy with imperfect knowledge. Journal of the European Economic Association 4, 366–375.CrossRefGoogle Scholar
Preston, B. (2005) Learning about monetary policy rules when long-horizon expectations matter. International Journal of Central Banking 1 (2), 81–126.Google Scholar
Preston, B. (2006) Adaptive learning, forecast-based instrument rules and monetary policy. Journal of Monetary Economics 53 (3), 507–535.CrossRefGoogle Scholar
Primiceri, G. (2006) Why inflation rose and fell: Policymakers' beliefs and U.S. Postwar stabilization policy. Quarterly Journal of Economics 121, 867–901.CrossRefGoogle Scholar
Roberts, J. (1997) Is inflation sticky? Journal of Monetary Economics 39, 173–196.CrossRefGoogle Scholar
Roberts, J. (1998) Inflation Expectations and the Transmission of Monetary Policy. Finance and Economics Discussion Paper No. 98-43, Board of Governors of the Federal Reserve System, Washington, DC.CrossRefGoogle Scholar
Rudd, J. and Whelan, K. (2005) Does labor's share drive inflation? Journal of Money, Credit, and Banking 37, 297–312.CrossRefGoogle Scholar
Santoro, S. (2003) Adaptive Learning and Inflation Dynamics in a Flexible Price Model. Manuscript, Universitat Pompeu Fabra.Google Scholar
Sargent, T. (1982) The ends of four big inflations. In Hall, R. (ed.), Inflation: Causes and Effects, pp. 41–97. Chicago: University of Chicago Press.Google Scholar
Sargent, T.J. (1999) The Conquest of American Inflation. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Schorfheide, F. (2005) Learning and monetary policy shifts. Review of Economics Dynamics 8, 392–419.CrossRefGoogle Scholar
Taylor, J. (1993) Discretion versus policy rules in practice. Carnegie–Rochester Conference Series on Public Policy 39, 195–214.CrossRefGoogle Scholar
Uhlig, H. (1999) A toolkit for analyzing nonlinear dynamic stochastic models easily. In Marimon, R. and Scott, A. (eds.), Computational Methods for the Study of Dynamic Economies, pp. 30–61. Oxford, UK: Oxford University Press.Google Scholar
Woodford, M. (2003) Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press.Google Scholar