This paper examines the welfare implications of managing asset-price with consumer-price inflation targeting by monetary authorities who have to learn the laws of motion for both inflation rates. Our results show that the Central Bank can reduce the volatility of consumption and asset price...

The literature on optimal monetary policy typically makes three major assumptions: 1) policymakers’ preferences are quadratic, 2) the economy is linear, and 3) stochastic shocks and policymakers’ prior beliefs about unobserved variables are normally distributed. This paper relaxes...

In this paper, we develop a model which explains why events in one market may trigger similar events in other markets, even though at first sight the markets appear to be only weakly related. We allow for multiple equilibria and learning dynamics in each market, and show that a jump between...

We examine the performance and robustness properties of monetary policy rules in an estimated macroeconomic model in which the economy undergoes structural change and where private agents and the central bank possess imperfect knowledge about the true structure of the economy. Private agents...

Persistent trends in R&D intensity and educational attainment, in conjunction with the absence of any trend in per capita income growth, are inconsistent with the predictions of most growth models. Jones (2002) has made a strong point that the data are consistent with out-of-steady state...

We examine optimal policy in an open-economy model with uncertainty and learning, where monetary policy actions affect the economy through the real exchange rate channel. Our results show that the degree of caution or activism in optimal policy depends on whether central banks are in coordinated...

The central tenet of inflation targeting is the anchoring of inflation expectations. In this paper, we reexamine the role of key elements of the inflation targeting framework towards this end, in the context of an economy where economic agents have an imperfect understanding of the macroeconomic...

We study how determinacy and learnability of global rational expectations equilibrium may be accected by monetary policy in a simple, two country, New Keynesian framework. The two blocks may be viewed as the U.S. and Europe, or as regions within the euro zone. We study cases in which optimal...

Long-range dependence in volatility is one of the most prominent examples of applications in financial market research involving universal power laws. Its characterization has recently spurred attempts at theoretical explanation of the underlying mechanism. This paper contributes to this recent...

We develop an estimated model of the U.S. economy in which agents form expectations by continually updating their beliefs regarding the behavior of the economy and monetary policy. We explore the effects of policymakers' misperceptions of the natural rate of unemployment during the late 1960s...