This paper analyses optimal monetary policy and welfare implications of three endogenous processes in forming inflation … forecast rules; the third process is a Bayesian learning about the central bank's inflation target. Transitional dynamics …

Economic theory predicts that intertemporal decisions depend critically on expectations about future outcomes. Using … of expectations for output growth, inflation, and the policy rate. We show that a simple unobserved components model of …

perform poorly when knowledge is imperfect. In particular, policies that fail to maintain tight control over inflation are … prone to episodes in which the public's expectations of inflation become uncoupled from the policy objective and stagflation … effective communication of a central bank's inflation objective and of continued vigilance against inflation in anchoring …