Simplicity versus optimality: The choice of monetary policy rules when agents must learn
✍ Scribed by Robert J. Tetlow; Peter von zur Muehlen
- Publisher
- Elsevier Science
- Year
- 2001
- Tongue
- English
- Weight
- 284 KB
- Volume
- 25
- Category
- Article
- ISSN
- 0165-1889
No coin nor oath required. For personal study only.
✦ Synopsis
The normal assumption of full information is dropped and the choice of monetary policy rules is instead examined when private agents must learn the rule. A small, forward-looking model is estimated and stochastic simulations conducted with agents using discounted least squares to learn of a change of preferences or a switch to a more complex rule. We "nd that the costs of learning a new rule may be substantial, depending on preferences and the rule that is initially in place. Policymakers with strong preferences for in#ation control incur substantial costs when they change the rule in use, but are nearly always willing to bear the costs. Policymakers with weak preferences for in#ation control may actually bene"t from agents' prior belief that a strong rule is in place.