Kiel Working Papers, Kiel Institute for World Economics
No 1444:
Central Bank Learning and Monetary Policy
Mewael F. Tesfaselassie
Abstract: We analyze optimal monetary policy when a central bank has
to learn about an unknown coefficient that determines the effect of
surprise inflation on aggregate demand. We derive the optimal policy under
active learning and compare it to two limiting cases---certainty
equivalence policy and cautionary policy, in which learning takes place
passively. Our novel result is that the two passive learning policies
represent an upper and lower bound for the active learning policy,
irrespective of the state of the economy
Keywords: parameter uncertainty; learning; monetary policy; (follow links to similar papers)
JEL-Codes: C02,; E52; (follow links to similar papers)
10 pages, August 2008
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