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MISPERCEPTIONS AND MONETARY POLICY IN A NEW‐KEYNESIAN MODEL
Author(s) -
Jääskelä Jarkko P.,
McKeown Jack
Publication year - 2006
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/j.1467-9485.2006.00399.x
Subject(s) - economics , monetary policy , new keynesian economics , inflation (cosmology) , economic shortage , output gap , aggregate demand , private sector , taylor rule , monetary economics , keynesian economics , macroeconomics , central bank , government (linguistics) , linguistics , philosophy , physics , theoretical physics , economic growth
This paper studies the consequences for the monetary policy design of information shortages on the part of the private sector. We model these shortages as exogenous shocks to expected income, which through an IS curve, disturb aggregate demand. We constrain policymakers to follow Taylor‐like rules but allow them to optimise coefficients: we find that the presence of misperceptions makes the optimised Taylor rule respond more aggressively to inflation and the output gap. We also find that if the policymaker is uncertain about misperceptions, then it is less costly to assume they are pervasive when they are not than the reverse. In other words, setting policy on the basis that the private sector is subject to misperceptions is a ‘robust’ policy.