Learning Monetary Policy Strategies at the Effective Lower Bound with Sudden Stops

We examine how private sector agents might learn a new monetary strategy in a stochastic environment in which large inflationary and deflationary shocks may occur unexpectedly. We consider a central bank that adopts a new asymmetric average inflation targeting rule aimed at countering the disinflationary bias imparted by the effective lower bound (ELB). The new rule is announced while at the ELB. The most crucial time for learning runs from when rates would be near liftoff under the old strategy through early liftoff under the new rule. Recessionary shocks during this time could delay learning while large inflationary shocks could outright stop it, inhibiting the ability of the new strategy to address the costs associated with the ELB. A large inflation surprise may thus give rise to a novel policy dilemma: The central bank could offset some of the inflation-induced learning loss by being even more accommodative than its new strategy, but this decision comes at the cost of higher near-term inflation and greater uncertainty about monetary policy.