PRECAUTIONARY LEARNING and INFLATIONARY BIASES

Chetan Dave, James Feigenbaum

    Research output: Contribution to journalArticle

    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 languageEnglish (US)
    JournalMacroeconomic Dynamics
    DOIs
    StateAccepted/In press - Jan 1 2018

    Fingerprint

    Central bank
    Precautionary motive
    Phillips curve
    Ramsey equilibrium
    Least squares estimator
    Loss function
    Monetary policy
    Inflation target

    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 journalArticle

    Dave, Chetan ; Feigenbaum, James. / PRECAUTIONARY LEARNING and INFLATIONARY BIASES. In: Macroeconomic Dynamics. 2018.
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