Monetary Policy and Heterogeneous Expectations
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Date
2010-04-30
Authors
Branch, William A.
Evans, George W., 1949-
Journal Title
Journal ISSN
Volume Title
Publisher
University of Oregon, Dept of Economics
Abstract
This paper studies the implications for monetary policy of heterogeneous
expectations in a New Keynesian model. The assumption of rational expec-
tations is replaced with parsimonious forecasting models where agents select
between predictors that are underparameterized. In a Misspecification Equilibrium agents only select the best-performing statistical models. We demonstrate
that, even when monetary policy rules satisfy the Taylor principle by adjusting
nominal interest rates more than one for one with inflation, there may exist
equilibria with Intrinsic Heterogeneity. Under certain conditions, there may
exist multiple misspecification equilibria. We show that these findings have important implications for business cycle dynamics and for the design of monetary
policy.
Description
25, 10 p. : ill. (some col.)
Keywords
Heterogeneous expectations, Monetary policy, Multiple equilibria, Adaptive learning