Abstract. This paper presents an estimated model with learning and provides evidence that learning can improve the …t of popular monetary DSGE models and endogenously generate realistic levels of persistence. The paper starts with an agnostic view, developing a model that nests learning and some of the structural sources of persistence, such as habit formation in consumption and in‡ation indexation, that are typically needed in monetary models with rational expectations to match the persistence of macroeconomic variables. I estimate the model by likelihood-based Bayesian methods, which allow the estimation of the learning gain coe ¢ cient jointly with the ‘deep’parameters of the economy. The empirical results show that when learning replaces rational expectations, the estimated degrees of habits and indexation drop near zero. This …nding suggests that persistence arises in the model economy mainly from expectations and learning. The posterior model probabilities show that the speci…cation with learning …ts signi…cantly better than does the speci…cation with rational expectations. Finally, if learning rather than mechanical sources of persistence provides a more appropriate representation of the economy, the implied optimal policy will be di¤erent. The policymaker will

This paper estimates a New Keynesian model to draw inferences about the behavior of the Federal Reserve’s unobserved inflation target. The results indicate that the target rose from 1 1/4 percent in 1959 to over 8 percent in the mid-to-late 1970s before falling back below 2 1/2 percent in 2004. The results also provide some support for the hypothesis that over the entire postwar period, Federal Reserve policy has systematically translated short-run price pressures set off by supply-side shocks into more persistent movements in inflation itself, although considerable uncertainty remains about the true source of shifts in the inflation target.

Simple econometric tests reported in the literature consistently re-port what appears to be a bias in inflation expectations. These results are commonly interpreted as constituting evidence overturning the hy-pothesis of rational expectations. In this paper, we investigate the validity of such an interpretation. The main tool utilized in our investigation is a computational dy-namic general equilibrium model capable of generating aggregate be-havior similar to the data along a number of dimensions. By construc-tion, the model embedded the assumption of rational expectations. Standard regressions run on equilibrium realizations of inflation and inflation expectations nevertheless reveal an apparent bias in inflation expectations. In these simulations, the null hypothesis of rational ex-pectations is incorrectly rejected in a large percentage of cases; a result that casts some doubt on conventional interpretations of the evidence. 1

This paper introduces a form of boundedly-rational expectations into an otherwise standard New Keynesian Phillips curve. The representative agent’s perceived law of motion allows for both temporary and permanent shocks to inflation, the latter intended to capture the possibility of evolving shifts in the central bank’s inflation target. The agent’s perceived optimal forecast rule defined by the Kalman filter is parameterized to be consistent with the observed moments of the inflation time series. From the agent’s perspective, the use of a variable Kalman gain parameter is justified by movements in the perceived “signal-to-noise ratio,” which measures the relative variances of the permanent and temporary shocks to inflation. I show that this simple model of inflation expectations can generate time-varying inflation dynamics similar to those observed in long-run U.S. data. The U.S. signal-to-noise ratio identified using the model’s methodology exhibits an upward drift during the 1970s, followed by downward drift from the mid-1990s onwards. This pattern suggests that the perceived signal-to-noise ratio might be viewed as a inverse measure of the central bank’s credibility for maintaining a constant inflation target. Model-based values for expected inflation track quite well with movements in survey-based measures of U.S. expected inflation.

dynamics and the yield curve: an encompassing

Abstract not found

This paper aims to infer the evolving Fed’s inflation target by estimating a monetary model under the assumptions of RE and learning. The results emphasize how different assumptions about expectations may have important effects on the inferred target movements.

This paper develops a dynamic stochastic general equilibrium (DSGE) model with sticky prices and sticky wages, where agents have imperfect information on the stance and direction of monetary policy. Agents respond by using Kalman filtering to unravel persistent and temporary monetary policy changes in order to form optimal forecasts of future policy actions. Our results show that a New Keynesian model with imperfect information and real rigidities can account for several key effects of an expansionary monetary policy shock: the hump-shaped increase in output, the delayed and gradual rise in inflation, and the fall in the nominal interest rate. JEL Classification: E31; E32; E52.

Abstract not found

This paper revisits the debate over the money supply versus the interest rate as the instrument of monetary policy. Using a dynamic stochastic general equilibrium framework, the authors examine the effects of alternative monetary policy rules on inflation persistence, the information content of monetary data, and real variables. They show that inflation persistence and the variability of inflation relative to money growth depend on whether the central bank follows a money growth rule or an interest rate rule. With a money growth rule, inflation is not persistent and the price level is much more volatile than the money supply. Those counterfactual implications are eliminated by the use of interest rate rules whether prices are sticky or not. A central bank’s use of interest rate rules, however, obscures the information content of monetary aggregates and also leads to subtle problems for econometricians trying to estimate money demand functions or to identify shocks to the trend and cycle components of the money stock. Federal Reserve Bank of St. Louis Review, September/October 2005, 87(5), pp. 633-58. Central banks around the world have long settled on the use of interest rates as instruments to implement monetary