Learning Dynamics in Monetary Policy : The Robustness of an Aggressive Price Stabilizing Policy

This paper investigates the effect of an aggressive price stabilizing monetary policy on the ability of agents to reach a rational expectations equilibrium (REE) for inflation and output. We provide a more robust policy implication than the one suggested by Bullard and Mitra (2002a,b). Using an adaptive learning framework, we develop a model that combines a real wage contracting rigidity with an interest rate rule, and an optimized IS curve. The equilibrium indicates that only an aggressive monetary policy enables agents to determine and learn the REE. We also show that inflation persistence is negatively related to the degree of aggressiveness