Journal article

The Science of Monetary Policy: An Imperfect Knowledge Perspective

S Eusepi, B PRESTON

Journal of Economic Literature | American Economic Association | Published : 2018

Abstract

This paper reevaluates the basic prescriptions of monetary policy design in the new Keynesian paradigm through the lens of imperfect knowledge. We show that while the basic logic of monetary policy design under rational expectations continues to obtain, perfect knowledge and learning can limit the set of policies available to central banks, rendering expectations management in general more difficult. Nonetheless, the desirability of some form of price-level targeting, inducing inertia in interest-rate policy, paramount under rational expectations, is robust to the assumption of imperfect knowledge.

University of Melbourne Researchers

Grants

Awarded by Australian Research Council


Funding Acknowledgements

The authors thank Jim Bullard, Marc Giannoni, and Mike Woodford for ongoing discussions about much of the material contained herein, and also a number of anonymous referees and the editors Janet Currie and Steven Durlauf for constructive feedback. Preston acknowledges research support from the Australian Research Council, under the grant FT130101599. The views expressed in the paper are those of the authors and are not necessarily reflective of views at the Federal Reserve Bank of New York or the Federal Reserve System. The usual caveat applies.