Hostname: page-component-cd9895bd7-p9bg8 Total loading time: 0 Render date: 2024-12-23T06:32:17.524Z Has data issue: false hasContentIssue false
  • English
  • Français

RATIONAL VS. LONG-RUN FORECASTERS: OPTIMAL MONETARY POLICY AND THE ROLE OF INEQUALITY

Published online by Cambridge University Press:  10 August 2017

Elton Beqiraj ,
Giovanni Di Bartolomeo  and
Carolina Serpieri
Elton Beqiraj
Affiliation:
Sapienza University of Rome
Giovanni Di Bartolomeo*
Affiliation:
Sapienza University of Rome
Carolina Serpieri
Affiliation:
Sapienza University of Rome
*
Address correspondence to: Giovanni Di Bartolomeo, Dipartimento di Economia e Diritto, Sapienza Università di Roma, via del Castro Laurenziano 9, 00161, Rome, Italy; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper builds a stylized simple sticky-price New Keynesian model where agents' beliefs are not homogeneous. We assume that agents choose optimal plans while considering forecasts of macroeconomic conditions over an infinite horizon. A fraction of them (boundedly rational agents) use heuristics to forecast macroeconomic variables over an infinite horizon. In our framework, we study optimal policies consistent with a second-order approximation of the policy objective from the consumers' utility function, assuming that the steady state is not distorted.

Keywords

Monetary PolicyBounded RationalityHeterogeneous Expectations
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Special Issue S1: Special Issue in Honor of Clifford Wymer on Developments in Macroeconomics , September 2019 , pp. 9 - 24
Copyright
Copyright © Cambridge University Press 2017 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

The authors are grateful to Marco Di Pietro, Salvatore Nisticò, Bianca Giannini, Willi Semmler, Patrizio Tirelli for useful comments on earlier drafts. They have benefited from comments on the MTP workshop (Rome). The authors also acknowledge financial support by Sapienza University of Rome.

References

REFERENCES

Anufriev, M., Assenza, T., Hommes, C., and Massaro, D. (2013) Interest rate rules and macroeconomic stability under heterogeneous expectations. Macroeconomic Dynamics 17, 1574–1604.Google Scholar
Benigno, P. and Woodford, M. (2012) Linear-quadratic approximation of optimal policy problems. Journal of Economic Theory 147 (1), 1–42.Google Scholar
Branch, W. A. (2004) The theory of rationally heterogeneous expectations: Evidence from survey data on inflation expectations. The Economic Journal 114 (497), 592–621.Google Scholar
Branch, W. A. and McGough, B. (2009) A New Keynesian model with heterogeneous expectations. Journal of Economic Dynamics and Control 33 (5), 1036–1051.Google Scholar
Brock, W. A. and Hommes, C. H. (1997) A rational route to randomness. Econometrica 65 (5), 1059–1096.Google Scholar
Brzoza-Brzezina, M., Kolasa, M., Koloch, G., Makarski, K., and Rubaszek, M. (2013) Monetary policy in a non-representative agent economy: A survey. Journal of Economic Surveys 27 (4), 641–669.Google Scholar
Calvo, G. A. (1983) Staggered prices in a utility–maximizing framework. Journal of Monetary Economics 12 (3), 383–398.Google Scholar
Capistrán, C. and Timmermann, A. (2009) Disagreement and biases in inflation expectations. Journal of Money, Credit and Banking 41 (2–3), 365–396.Google Scholar
Carroll, C. (2003) Macroeconomic expectations of households and professional forecasters. Quarterly Journal of Economics 118 (1), 269–298.Google Scholar
Coibion, O. and Gorodnichenko, Y. (2015) Information rigidity and the expectations formation process: A simple framework and new facts. American Economic Review 105 (8), 2644–2678.Google Scholar
Di Bartolomeo, G. and Di Pietro, M. (2016) Optimal inflation targeting rule under positive hazard functions for price changes. Macroeconomic Dynamics 1–18, doi:10.1017/S1365100516000535.Google Scholar
Di Bartolomeo, G., Di Pietro, M., and Giannini, B. (2016) Optimal monetary policy in a New Keynesian model with heterogeneous expectations. Journal of Economic Dynamics and Control 73, 373–387.Google Scholar
Diks, C. and Van Der Weide, R. (2005) Herding, a-synchronous updating and heterogeneity in memory in a CBS. Journal of Economic Dynamics and Control 29 (4), 741–763.Google Scholar
Evans, G. W. and Honkapohja, S. (2003) Adaptive learning and monetary policy design. Journal of Money, Credit and Banking 35 (6), 1045–1072.Google Scholar
Gasteiger, E. (2014) Heterogeneous expectations, optimal monetary policy, and the merit of policy inertia. Journal of Monetary, Credit and Banking 46 (7), 1533–1554.Google Scholar
Massaro, D. (2013) Heterogeneous expectations in monetary DSGE models. Journal of Economic Dynamics and Control 37 (3), 680–692.Google Scholar
Pfajfar, D. and Santoro, E. (2010) Heterogeneity, learning and information stickiness in inflation expectations. Journal of Economic Behavior & Organization 75 (3), 426–444.Google Scholar
Preston, B. (2006) Adaptive learning, forecast-based instrument rules and monetary policy. Journal of Monetary Economics 53 (3), 507–535.Google Scholar
Ravenna, F. and Walsh, C. E. (2011) Welfare-based optimal monetary policy with unemployment and sticky prices: A linear-quadratic framework. American Economic Journal: Macroeconomics 3 (2), 130–162.Google Scholar
Rotemberg, J. J. and Woodford, M. (1997) An optimization-based econometric framework for the evaluation of monetary policy. NBER Macroeconomics Annual 12, 297–361.Google Scholar
Steinsson, J. (2003) Optimal monetary policy in an economy with inflation persistence. Journal of Monetary Economics 50 (7), 1425–1456.Google Scholar