The Science of Monetary Policy: An Imperfect Knowledge Perspective
Journal of Economic Literature
vol. 56,
no. 1, March 2018
(pp. 3-59)
Abstract
This paper reevaluates the basic prescriptions of monetary policy design in the new Keynesian paradigm through the lens of imperfect knowledge. We show that while the basic logic of monetary policy design under rational expectations continues to obtain, perfect knowledge and learning can limit the set of policies available to central banks, rendering expectations management in general more difficult. Nonetheless, the desirability of some form of price-level targeting, inducing inertia in interest-rate policy, paramount under rational expectations, is robust to the assumption of imperfect knowledge.Citation
Eusepi, Stefano, and Bruce Preston. 2018. "The Science of Monetary Policy: An Imperfect Knowledge Perspective." Journal of Economic Literature, 56 (1): 3-59. DOI: 10.1257/jel.20160889Additional Materials
JEL Classification
- D84 Expectations; Speculations
- E13 General Aggregative Models: Neoclassical
- E31 Price Level; Inflation; Deflation
- E52 Monetary Policy
- E58 Central Banks and Their Policies