Christopher Gibbs (University of Sydney) - Optimal Monetary Policy when Expectations are Rational, Fixed, Learned, or Anything in Between

Research Seminar - Christopher Gibbs (University of Sydney) - Optimal Monetary Policy when Expectations are Rational, Fixed, Learned, or Anything in Between

Abstract:

There is broad agreement that expectations play a central role in the transmission of monetary policy to real economic activity. There is far less agreement, however, in how people form expectations. We revisit optimal monetary policy design in a model where expectations are formed using a mix of rational and adaptive learning beliefs. The beliefs approximate several alternative models of expectation formation - fixed, learning, myopic, level-k, and rational - using only two parameters. We derive the optimal targeting criterion in the model as a function of these parameters, i.e., in terms of how beliefs are formed. A weighted average inflation target plus adjustments for belief persistence and the zero lower bound characterize optimal policy. Our target criterion provides a theoretical justification for Flexible Average Inflation Targeting, where we make explicit what average and flexible should mean.

Online Research seminars organized by the Bank of Finland's Research Unit are open to all researchers interested in the subjects covered. Those wishing to attend a seminar are kindly asked to register in advance, by filling in the Online Registration Form.

The registration for each seminar is open until 9:00 am the day of the seminar. You will receive a link to join the seminar by email at the latest one hour before the seminar is scheduled to begin.