Learning Dynamics In Monetary Policy: The Robustness of an Aggressive Inflation Stabilizing Policy
Finance, Real Estate, and Business Law
This paper investigates the effect of an aggressive inflation stabilizing monetary policy on the ability of agents to reach a rational expectations equilibrium for inflation and output. Using an adaptive learning framework we develop a model that combines a real wage contracting rigidity with an interest rate rule. We show that an AR(1) equilibrium requires more aggressive monetary policy to achieve both determinacy and learnability. This model and policy findings contrast with Bullard and Mitra's [Determinacy, learnability and monetary policy inertia (2001); Journal of Monetary Economics 49 (2002) 1105] model (no inflation persistence) and policy findings (less aggressive policy). These results suggest that aggressive policy is robust in different model specifications. (C) 2004 Elsevier Inc. All rights reserved.
Journal of Macroeconomics
Wong, M. S.
(2005). Learning Dynamics In Monetary Policy: The Robustness of an Aggressive Inflation Stabilizing Policy. Journal of Macroeconomics, 27(1), 143-151.
Available at: http://aquila.usm.edu/fac_pubs/2861