Some implications of learning for price stability
S Eusepi, MP Giannoni, B Preston
European Economic Review | Elsevier | Published : 2018
Survey data on expectations of a range of macroeconomic variables exhibit low-frequency drift. In a New Keynesian model consistent with these empirical properties, optimal policy in general delivers a positive inflation rate in the long run. Two special cases deliver classic outcomes under rational expectations: as the degree of low-frequency variation in beliefs goes to zero, the long-run inflation rate coincides with the inflation bias under optimal discretion; for non-zero low-frequency drift in beliefs, as households become highly patient valuing utility in any period equally, the optimal long-run inflation rate coincides with optimal commitment – price stability is optimal. The optimal ..View full abstract
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Awarded by Australian Research Council
The authors thank Chris Gibbs, James Hansen and Michael Woodford for useful discussions. The usual caveat applies. 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, Federal Reserve Bank of Dallas or the Federal Reserve System. Preston acknowledges research support from the Australian Research Council, under the grant FT130101599.