(This abstract was borrowed from another version of this item.)"> (This abstract was borrowed from another version of this item.)">
[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/mcb/jmoncb/v43y2011i8p1685-1706.html
   My bibliography  Save this article

Learning about the Term Structure and Optimal Rules for Inflation Targeting

Author

Listed:
  • MEWAEL F. TESFASELASSIE
  • ERIC SCHALING
  • SYLVESTER EIJFFINGER
Abstract
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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Mewael F. Tesfaselassie & Eric Schaling & Sylvester Eijffinger, 2011. "Learning about the Term Structure and Optimal Rules for Inflation Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(8), pages 1685-1706, December.
    • Handle: RePEc:mcb:jmoncb:v:43:y:2011:i:8:p:1685-1706
    DOI: j.1538-4616.2011.00463.x
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1111/j.1538-4616.2011.00463.x
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/j.1538-4616.2011.00463.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
    2. James B. Bullard, 2006. "The learnability criterion and monetary policy," Review, Federal Reserve Bank of St. Louis, vol. 88(May), pages 203-217.
    3. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
    4. Yetman, James, 2003. "Probing potential output: Monetary policy, credibility, and optimal learning under uncertainty," Journal of Macroeconomics, Elsevier, vol. 25(3), pages 311-330, September.
    5. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    6. Volker Wieland, "undated". "Monetary Policy and Uncertainty about the Natural Unemployment Rate," Computing in Economics and Finance 1997 11, Society for Computational Economics.
    7. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, April.
    8. George W. Evans & Seppo Honkapohja, 2003. "Adaptive learning and monetary policy design," Proceedings, Federal Reserve Bank of Cleveland, pages 1045-1084.
    9. Thomas Sargent & Noah Williams & Tao Zha, 2009. "The Conquest of South American Inflation," Journal of Political Economy, University of Chicago Press, vol. 117(2), pages 211-256, April.
    10. Ellison, Martin & Valla, Natacha, 2001. "Learning, uncertainty and central bank activism in an economy with strategic interactions," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 153-171, August.
    11. Lars E. O. Svensson, 1999. "Inflation Targeting: Some Extensions," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(3), pages 337-361, September.
    12. Ellison, Martin, 2006. "The learning cost of interest rate reversals," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1895-1907, November.
    13. Svensson, Lars E. O. & Williams, Noah, 2006. "Bayesian and adaptive optimal policy under model uncertainty," CFS Working Paper Series 2007/11, Center for Financial Studies (CFS).
    14. Beck, Gunter W. & Wieland, Volker, 2002. "Learning and control in a changing economic environment," Journal of Economic Dynamics and Control, Elsevier, vol. 26(9-10), pages 1359-1377, August.
    15. Pollock, D. S. G., 2003. "Recursive estimation in econometrics," Computational Statistics & Data Analysis, Elsevier, vol. 44(1-2), pages 37-75, October.
    16. James B. Bullard & Eric Schaling, 2001. "New economy-new policy rules," Review, Federal Reserve Bank of St. Louis, vol. 83(May), pages 57-66.
    17. James Bullard & Eric Schaling, 2009. "Monetary Policy, Determinacy, and Learnability in a Two-Block World Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(8), pages 1585-1612, December.
    18. Eijffinger, S.C.W. & Schaling, E. & Verhagen, W.H., 1998. "The Term Structure of Interest Rates and Inflation Forecast Targeting," Discussion Paper 1998-85, Tilburg University, Center for Economic Research.
    19. Schaling, Eric, 2004. "The Nonlinear Phillips Curve and Inflation Forecast Targeting: Symmetric versus Asymmetric Monetary Policy Rules," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 361-386, June.
    20. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    21. Eric Schaling & James Bullard, 2005. "Monetary Policy, Determinacy, and Learnability in the Open Economy," Computing in Economics and Finance 2005 362, Society for Computational Economics.
    22. Athanasios Orphanides & John Williams, 2004. "Imperfect Knowledge, Inflation Expectations, and Monetary Policy," NBER Chapters, in: The Inflation-Targeting Debate, National Bureau of Economic Research, Inc.
    23. James B. Bullard, 1991. "Learning, rational expectations and policy: a summary of recent research," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 50-60.
    24. Wieland, Volker, 2000. "Monetary policy, parameter uncertainty and optimal learning," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 199-228, August.
    25. repec:zbw:bofrdp:2004_023 is not listed on IDEAS
    26. Wieland Volker, 2006. "Monetary Policy and Uncertainty about the Natural Unemployment Rate: Brainard-Style Conservatism versus Experimental Activism," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-34, March.
    27. Milani, Fabio, 2007. "Expectations, learning and macroeconomic persistence," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2065-2082, October.
    28. Rudebusch, Glenn D. & Svensson, Lars E. O., 2002. "Eurosystem monetary targeting: Lessons from U.S. data," European Economic Review, Elsevier, vol. 46(3), pages 417-442, March.
    29. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, April.
    30. Kozicki, Sharon & Tinsley, P.A., 2008. "Term structure transmission of monetary policy," The North American Journal of Economics and Finance, Elsevier, vol. 19(1), pages 71-92, March.
    31. Vitor Gaspar & Frank Smets & David Vestin, 2006. "Adaptive Learning, Persistence, and Optimal Monetary Policy," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 376-385, 04-05.
    32. Fuhrer, Jeffrey C & Moore, George R, 1995. "Monetary Policy Trade-offs and the Correlation between Nominal Interest Rates and Real Output," American Economic Review, American Economic Association, vol. 85(1), pages 219-239, March.
    33. Levin, Andrew T. & Moessner, Richhild, 2005. "Inflation persistence and monetary policy design: an overview," Working Paper Series 539, European Central Bank.
    34. Schaling, Eric & Eijffinger, Sylvester C. W. & Tesfaselassie, Mewael F., 2004. "Heterogenous information about the term structure, least-squares learning and optimal rules for inflation targeting," Bank of Finland Research Discussion Papers 23/2004, Bank of Finland.
    35. Ben S. Bernanke & Michael Woodford, 2004. "The Inflation-Targeting Debate," NBER Books, National Bureau of Economic Research, Inc, number bern04-1.
    36. Stephen Pollock, 2002. "Recursive Estimation in Econometrics," Working Papers 462, Queen Mary University of London, School of Economics and Finance.
    37. Kiefer, Nicholas M & Nyarko, Yaw, 1989. "Optimal Control of an Unknown Linear Process with Learning," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(3), pages 571-586, August.
    38. Tesfaselassie, M.F., 2005. "Communication, learning and optimal monetary policy," Other publications TiSEM 33c69063-eed7-4938-9f51-e, Tilburg University, School of Economics and Management.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Njindan Iyke, Bernard, 2015. "On The Term Structure of South African Interest Rates: Cointegration and Threshold Adjustment," MPRA Paper 67681, University Library of Munich, Germany.
    2. D.A. Kendrick & H.M. Amman & M.P. Tucci, 2008. "Learning About Learning in Dynamic Economic Models," Working Papers 08-20, Utrecht School of Economics.
    3. Tesfaselassie, M.F. & Schaling, E., 2010. "Managing disinflation under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 34(12), pages 2568-2577, December.
    4. Lars E.O. Svensson & Noah Williams, 2009. "Optimal Monetary Policy under Uncertainty in DSGE Models: A Markov Jump-Linear-Quadratic Approach," Central Banking, Analysis, and Economic Policies Book Series, in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 3, pages 077-114, Central Bank of Chile.
    5. Lars E. O. Svensson & Noah Williams, 2008. "Optimal monetary policy under uncertainty: a Markov jump-linear-quadratic approach," Review, Federal Reserve Bank of St. Louis, vol. 90(Jul), pages 275-294.
    6. Svensson, Lars E. O. & Williams, Noah, 2006. "Bayesian and adaptive optimal policy under model uncertainty," CFS Working Paper Series 2007/11, Center for Financial Studies (CFS).
    7. Eric Schaling & Marco Hoeberichts, 2010. "Why Speed Doesn’t Kill: Learning to Believe in Disinflation," De Economist, Springer, vol. 158(1), pages 23-42, April.
    8. Svensson, Lars E.O., 2010. "Inflation Targeting," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 22, pages 1237-1302, Elsevier.
    9. Williams, Noah, 2012. "Monetary policy under financial uncertainty," Journal of Monetary Economics, Elsevier, vol. 59(5), pages 449-465.
    10. Bernard Njindan Iyke, 2017. "On the term structure of South African interest rates: cointegration and threshold adjustment," International Journal of Sustainable Economy, Inderscience Enterprises Ltd, vol. 9(4), pages 300-321.
    11. Tesfaselassie, Mewael F., 2008. "Central bank learning and monetary policy," Kiel Working Papers 1444, Kiel Institute for the World Economy (IfW Kiel).
    12. Matteo Cacciatore & Dmitry Matveev & Rodrigo Sekkel, 2022. "Uncertainty and Monetary Policy Experimentation: Empirical Challenges and Insights from Academic Literature," Discussion Papers 2022-9, Bank of Canada.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Schaling, Eric & Eijffinger, Sylvester & Tesfaselassie, Mewael, 2004. "Heterogenous information about the term structure, least-squares learning and optimal rules for inflation targeting," Research Discussion Papers 23/2004, Bank of Finland.
    2. repec:zbw:bofrdp:2004_023 is not listed on IDEAS
    3. Volker Wieland, 2009. "Learning, Endogenous Indexation, and Disinflation in the New-Keynesian Model," Central Banking, Analysis, and Economic Policies Book Series, in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 11, pages 413-450, Central Bank of Chile.
    4. Tesfaselassie, Mewael F., 2008. "Central bank learning and monetary policy," Kiel Working Papers 1444, Kiel Institute for the World Economy (IfW Kiel).
    5. Schaling, E. & Eijffinger, S.C.W. & Tesfaselassie, M.F., 2004. "Heterogeneous Information about the Term Structure of Interest rates, Least-Squares Learning and Optimal Interest Rate Rules for Inflation Forecast Targeting," Discussion Paper 2004-14, Tilburg University, Center for Economic Research.
    6. Schaling, Eric & Eijffinger, Sylvester C. W. & Tesfaselassie, Mewael F., 2004. "Heterogenous information about the term structure, least-squares learning and optimal rules for inflation targeting," Bank of Finland Research Discussion Papers 23/2004, Bank of Finland.
    7. Schaling, Eric & Eijffinger, Sylvester & Tesfaselassie, Mewael F., 2004. "Heterogenous Information About the Term Structure of Interest Rates, Least-Squares Learning and Optimal Interest Rate Rules," CEPR Discussion Papers 4279, C.E.P.R. Discussion Papers.
    8. Tesfaselassie, M.F. & Schaling, E., 2010. "Managing disinflation under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 34(12), pages 2568-2577, December.
    9. George W. Evans & Seppo Honkapohja, 2009. "Expectations, Learning and Monetary Policy: An Overview of Recent Research," Central Banking, Analysis, and Economic Policies Book Series, in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 2, pages 027-076, Central Bank of Chile.
    10. Vitor Gaspar & Frank Smets & David Vestin, 2006. "Optimal Monetary Policy under Adaptive Learning," Computing in Economics and Finance 2006 183, Society for Computational Economics.
    11. Matteo Cacciatore & Dmitry Matveev & Rodrigo Sekkel, 2022. "Uncertainty and Monetary Policy Experimentation: Empirical Challenges and Insights from Academic Literature," Discussion Papers 2022-9, Bank of Canada.
    12. repec:zbw:bofrdp:2007_032 is not listed on IDEAS
    13. Beck, Guenter W. & Wieland, Volker, 2008. "Central bank misperceptions and the role of money in interest-rate rules," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages 1-17, October.
    14. George W. Evans & Seppo Honkapohja, 2009. "Expectations, Learning and Monetary Policy: An Overview of Recent Research," Central Banking, Analysis, and Economic Policies Book Series, in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 2, pages 027-076, Central Bank of Chile.
    15. Svensson, Lars E.O., 2010. "Inflation Targeting," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 22, pages 1237-1302, Elsevier.
    16. Tesfaselassie, M.F., 2005. "Communication, learning and optimal monetary policy," Other publications TiSEM 33c69063-eed7-4938-9f51-e, Tilburg University, School of Economics and Management.
    17. Tim Willems, 2017. "Actively Learning by Pricing: A Model of an Experimenting Seller," Economic Journal, Royal Economic Society, vol. 127(604), pages 2216-2239, September.
    18. Felipe Morandé & Mauricio Tejada, 2008. "Sources of Uncertainty for Conducting Monetary Policy in Chile," Working Papers Central Bank of Chile 492, Central Bank of Chile.
    19. Yu-chin Chen & Pisut Kulthanavit, 2008. "Adaptive Learning and Monetary Policy: Lessons from Japan," Working Papers UWEC-2008-12-P, University of Washington, Department of Economics, revised Oct 2008.
    20. Philip Arestis & Alexander Mihailov, 2011. "Classifying Monetary Economics: Fields And Methods From Past To Future," Journal of Economic Surveys, Wiley Blackwell, vol. 25(4), pages 769-800, September.
    21. Paul De Grauwe, 2012. "Lectures on Behavioral Macroeconomics," Economics Books, Princeton University Press, edition 1, volume 1, number 9891.
    22. Gáti, Laura, 2023. "Monetary policy & anchored expectations—An endogenous gain learning model," Journal of Monetary Economics, Elsevier, vol. 140(S), pages 37-47.

    More about this item

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mcb:jmoncb:v:43:y:2011:i:8:p:1685-1706. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley-Blackwell Digital Licensing or Christopher F. Baum (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.