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Monetary Policy with Imperfect Knowledge in a Small Open Economy

Author

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  • Yu-chin Chen
  • Pisut Kulthanavit
Abstract
Incorporating adaptive learning into a small-open-economy DSGE model, we analyze how monetary policy rules should adjust when agents' information set deviates from that assumed under the rational expectations framework. We find that when agents observe current shocks but do not observe the parameters governing key macroeconomic dynamics, the resulting distortion is small and the preferred policy under rational expectations works well. However, the welfare cost of imperfect knowledge becomes quite severe when agents also have to learn about the structural shocks to the economy. Monetary policy can play a significant role in mitigating distortions associated with this form of imperfect knowledge.

Suggested Citation

  • Yu-chin Chen & Pisut Kulthanavit, 2016. "Monetary Policy with Imperfect Knowledge in a Small Open Economy," PIER Discussion Papers 28, Puey Ungphakorn Institute for Economic Research.
    • Handle: RePEc:pui:dpaper:28
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    More about this item

    Keywords

    Adaptive Learning; Monetary Policy Rules; Open Economy;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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