Optimized Taylor rules for disinflation when agents are learning

Timothy Cogley, Christian Matthes, Argia M. Sbordone

    Research output: Contribution to journalArticlepeer-review

    Abstract

    When private agents learn a new policy rule, an optimal simple Taylor rule for disinflation differs substantially from that under full information. The central bank can reduce target inflation without much difficulty, but adjusting reaction coefficients on lagged inflation and output is more costly. Temporarily explosive dynamics emerge when there is substantial disagreement between perceived and actual feedback parameters, making the transition highly volatile. The bank copes by choosing reaction coefficients close to the private sector[U+05F3]s prior mode, thereby sacrificing long-term performance in exchange for achieving lower transitional volatility.

    Original languageEnglish (US)
    Pages (from-to)131-147
    Number of pages17
    JournalJournal of Monetary Economics
    Volume72
    DOIs
    StatePublished - May 1 2015

    Keywords

    • Inflation
    • Learning
    • Monetary policy
    • Policy reforms
    • Transitions

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics

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