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Learning about the Term Structure and Optimal Rules for Inflation Targeting
Author(s) -
TESFASELASSIE MEWAEL F.,
SCHALING ERIC,
EIJFFINGER SYLVESTER
Publication year - 2011
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2011.00463.x
Subject(s) - monetary policy , economics , leverage (statistics) , incentive , yield curve , term (time) , inflation (cosmology) , new keynesian economics , interest rate , monetary economics , inflation targeting , macroeconomics , microeconomics , computer science , physics , quantum mechanics , machine learning , theoretical physics
In this paper, we incorporate the term structure of interest rates in the New Keynesian model and analyze optimal policy under uncertainty about private sector expectations and the degree of inflation persistence. The novel result of our paper is that for large deviations of inflation from its target, the active learning policy is less activist—in the sense of responding less aggressively to the state of the economy—than a myopic policy, which ignores the learning channel. Moreover, for most initial beliefs, the incentive for active learning increases as monetary policy’s leverage over the long‐term interest rate increases.