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Precautionary Learning And Inflationary Biases

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  • Dave, Chetan
  • Feigenbaum, James

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.

Suggested Citation

  • Dave, Chetan & Feigenbaum, James, 2020. "Precautionary Learning And Inflationary Biases," Macroeconomic Dynamics, Cambridge University Press, vol. 24(5), pages 1124-1150, July.
    • Handle: RePEc:cup:macdyn:v:24:y:2020:i:5:p:1124-1150_5
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    References listed on IDEAS

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    7. Evans, George W. & Honkapohja, Seppo, 1999. "Learning dynamics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 7, pages 449-542, Elsevier.
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    Cited by:

    1. Lianfeng Song & Hongxia Wang & Huanshui Zhang & Hongdan Li, 2023. "Rational Expectations Models with Multiplicative Noise," Journal of Optimization Theory and Applications, Springer, vol. 199(1), pages 233-257, October.
    2. Dave, Chetan & Sorge, Marco M., 2021. "Equilibrium indeterminacy and sunspot tales," European Economic Review, Elsevier, vol. 140(C).

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    More about this item

    JEL classification:

    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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