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American Economic Review: Vol. 100 No. 1 (March 2010)

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Robustly Optimal Monetary Policy with Near-Rational Expectations

Article Citation

Woodford, Michael. 2010. "Robustly Optimal Monetary Policy with Near-Rational Expectations." American Economic Review, 100(1): 274-303.

DOI: 10.1257/aer.100.1.274

Abstract

The paper considers optimal monetary stabilization policy in a forward-looking model, when the central bank recognizes that private sector expectations need not be precisely model-consistent, and wishes to choose a policy that will be as good as possible in the case of any beliefs that are close enough to model-consistency. It is found that commitment continues to be important for optimal policy, that the optimal long-run inflation target is unaffected by the degree of potential distortion of beliefs, and that optimal policy is even more history-dependent than if rational expectations are assumed. (JEL C62, D84, E13, E31, E32, E52)

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Authors

Woodford, Michael (Columbia U)

JEL Classifications

C62: Existence and Stability Conditions of Equilibrium
D84: Expectations; Speculations
E13: General Aggregative Models: Neoclassical
E31: Price Level; Inflation; Deflation
E32: Business Fluctuations; Cycles
E52: Monetary Policy


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