COVID-19

Some implications of learning for price stability

Vol: 
CAMA Working Paper 8/2017
Author name: 
Stefano Eusepi
Marc P. Giannoni
Bruce Preston
Year: 
2017
Month: 
January
Abstract: 

Survey data on expectations of a range of macroeconomic variables exhibit lowfrequency drift. In a New Keynesian model consistent with these empirical properties, optimal policy in general delivers a positive inflation rate in the long run. Two special cases deliver classic outcomes under rational expectations: as the degree of lowfrequency variation in beliefs goes to zero, the long-run inflation rate coincides with the inflation bias under optimal discretion; for non-zero low-frequency drift in beliefs, as households become highly patient valuing utility in any period equally, the optimal longrun inflation rate coincides with optimal commitment - price stability is optimal.

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