Title

Learning Dynamics in Monetary Policy: The Robustness of an Aggressive Price Stabilizing Policy

Document Type

Article

Publication Date

2005

Source Publication

Journal of Macroeconomics

Abstract

This paper investigates the effect of an aggressive inflation stabilizing monetary policy on the ability of agents to reach a rational expectations equilibrium for inflation and output. Using an adaptive learning framework, we develop a model that combines a real wage contracting rigidity with an interest rate rule. We show that an AR(1) equilibrium requires more aggressive monetary policy to achieve both determinacy and learnability. This model and policy findings contrast with Bullard and Mitra’s [Determinacy, learnability and monetary policy inertia (2001); Journal of Monetary Economics 49 (2002) 1105] model (no inflation persistence) and policy findings (less aggressive policy). These results suggest that aggressive policy is robust in different model specifications.

Comments

Journal of Macroeconomics, Volume 27, Issue 1, PP 143-151 (March, 2005). DOI: 10.1016/j.jmacro.2003.08.002