Learning process and rational expectations: an analysis using a small macroeconomic model for New Zealand

The nature of expectations matters when conducting monetary policy. Models with a learning process can exhibit very different properties from models with other types of expectations rules. This paper draws on the work of Orphanides and Williams (2002), extending it to allow for the possibility that the learning process may not be perpetual, but rather might be converging towards a rational expectations equilibrium. By modelling expectations using a learning process, we obtain evidence suggesting that inflation expectations in New Zealand are moving towards rational expectations. Theory suggests this will make it easier to control inflation after a temporary disturbance.