PRECAUTIONARY LEARNING and INFLATIONARY BIASES

Chetan Dave, James Feigenbaum

Research output: Contribution to journalArticle

Abstract

In a canonical monetary policy model in which the central bank learns about underlying fundamentals by estimating the parameters of a Phillips curve, we show that the bank's loss function is asymmetric such that parameter overestimates may be more or less costly than underestimates, creating a precautionary motive in estimation. This motive suggests the use of a more efficient variance-adjusted least-squares estimator for learning about fundamentals. Informed by this "precautionary learning" the central bank sets low inflation targets, and the economy can settle near a Ramsey equilibrium.

Original languageEnglish (US)
Pages (from-to)1124-1150
Number of pages27
JournalMacroeconomic Dynamics
Volume24
Issue number5
DOIs
StatePublished - Jul 1 2020

Keywords

  • Adaptive Learning
  • Asymmetric Least Squares
  • Inflationary Biases
  • Time Consistency

ASJC Scopus subject areas

  • Economics and Econometrics

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