Heterogeneous Expectations, Optimal Monetary Policy, and the Merit of Policy Inertia

Emanuel Gasteiger

VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy from Verein für Socialpolitik / German Economic Association

Abstract: The design and analysis of optimal monetary policy is usually guided by the paradigm of homogeneous rational expectations. Instead, we examine the dynamic consequences of implementation strategies, when the actual economy features expectational heterogeneity. Agents have either rational or adaptive expectations. Consequently the central bank's ability to achieve price-stability under heterogeneous expectations depends on its objective and implementation strategy. An expectations-based reaction function, which appropriately conditions on private sector expectations, performs exceptionally well. However, once the objective introduces policy inertia, popular strategies can fail. These results call for new implementation strategies under interest rate stabilization.

JEL-codes: D83 D84 E52 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (29)

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Journal Article: Heterogeneous Expectations, Optimal Monetary Policy, and the Merit of Policy Inertia (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc14:100555

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