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Learning, expectations and monetary policy

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  • Pablo Garcia

Abstract

I present a New Keynesian model in which the central bank’s anti-inflationary preferences change over time. Agents do not observe the current monetary regime, but rationally learn about it using Bayes theorem. The model provides a structural interpretation for the contractionary effects of monetary policy uncertainty shocks as recently documented in the empirical literature. In addition, the model shows that learning reduces the effects of monetary policy on the economy by softening the link between fundamentals and equilibrium prices and allocations.

Suggested Citation

  • Pablo Garcia, 2021. "Learning, expectations and monetary policy," BCL working papers 153, Central Bank of Luxembourg.
    • Handle: RePEc:bcl:bclwop:bclwp153
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    File URL: https://www.bcl.lu/en/publications/Working-papers/153/BCLWP153.pdf
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    More about this item

    Keywords

    C11; D83; E52;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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