Monetary policy and learning from the central bank's forecast

Abstract

We examine the expectational stability (E-stability) of the rational expectations equilibrium (REE) in a simple New Keynesian model in which private agents engage in adaptive learning by referring to the central bank's forecast. In this environment, to satisfy the E-stability condition, the central bank must respond more strongly to the expected inflation rate than the so-called Taylor principle suggests. On the other hand, the central bank's strong reaction to the expected inflation rate raises the possibility of indeterminacy of the REE. In considering these problems, a robust policy is to respond to the current inflation rate to a certain degree.

A Note on Expectational Stability Under Nonzero Trend Inflation

“…As for the forecast-based rule, we assume that the central bank and private agents make identical forecasts. Honkapohja and Mitra (2005) and Muto (2011) introduce alternative setups in which the central bank and private agents make heterogeneous forecasts or one of their forecasts is influential to the other, although they assume that trend inflation is zero.…”

Productivity growth, transparency, and monetary policy

“…However, he, as well as Fujiwara (2005), shows that, in the case of Japan, the influence is significant. As for the latter situation, Muto (2011) theoretically investigates what kind of monetary policy actions are desirable when private agents are learning from the central bank's forecast. 15 In the preliminary version of this study we introduced a mechanism through which private agents gradually learn the value of l C by observing the central bank's policy actions.…”

Do Central Bank Forecasts Influence Private Agents? Forecasting Performance versus Signals

“…This question also matters theoretically: Bernanke and Woodford () and Muto () reach different conclusions on the effects of the link between CB forecasts and private forecasts. The former show that monetary policy influenced by private expectations could lead to indeterminacy, while the latter argues that when private forecasts follow CB forecasts, policymakers must respond more strongly to expected inflation to achieve macroeconomic stability.…”