Abstract
In a canonical monetary policy model in which the central bank learns about underlying fundamentals by estimating the parameters of a Phillips curve, we show that the bank's loss function is asymmetric such that parameter overestimates may be more or less costly than underestimates, creating a precautionary motive in estimation. This motive suggests the use of a more efficient variance-adjusted least-squares estimator for learning about fundamentals. Informed by this "precautionary learning" the central bank sets low inflation targets, and the economy can settle near a Ramsey equilibrium.
| Original language | English (US) |
|---|---|
| Journal | Macroeconomic Dynamics |
| DOIs | |
| State | Accepted/In press - Jan 1 2018 |
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Keywords
- Adaptive Learning
- Asymmetric Least Squares
- Inflationary Biases
- Time Consistency
ASJC Scopus subject areas
- Economics and Econometrics
Cite this
PRECAUTIONARY LEARNING and INFLATIONARY BIASES. / Dave, Chetan; Feigenbaum, James.
In: Macroeconomic Dynamics, 01.01.2018.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - PRECAUTIONARY LEARNING and INFLATIONARY BIASES
AU - Dave, Chetan
AU - Feigenbaum, James
PY - 2018/1/1
Y1 - 2018/1/1
N2 - In a canonical monetary policy model in which the central bank learns about underlying fundamentals by estimating the parameters of a Phillips curve, we show that the bank's loss function is asymmetric such that parameter overestimates may be more or less costly than underestimates, creating a precautionary motive in estimation. This motive suggests the use of a more efficient variance-adjusted least-squares estimator for learning about fundamentals. Informed by this "precautionary learning" the central bank sets low inflation targets, and the economy can settle near a Ramsey equilibrium.
AB - In a canonical monetary policy model in which the central bank learns about underlying fundamentals by estimating the parameters of a Phillips curve, we show that the bank's loss function is asymmetric such that parameter overestimates may be more or less costly than underestimates, creating a precautionary motive in estimation. This motive suggests the use of a more efficient variance-adjusted least-squares estimator for learning about fundamentals. Informed by this "precautionary learning" the central bank sets low inflation targets, and the economy can settle near a Ramsey equilibrium.
KW - Adaptive Learning
KW - Asymmetric Least Squares
KW - Inflationary Biases
KW - Time Consistency
UR - http://www.scopus.com/inward/record.url?scp=85056588410&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85056588410&partnerID=8YFLogxK
U2 - 10.1017/S1365100518000731
DO - 10.1017/S1365100518000731
M3 - Article
AN - SCOPUS:85056588410
JO - Macroeconomic Dynamics
JF - Macroeconomic Dynamics
SN - 1365-1005
ER -