This paper analyzes how the formation of expectations constrains monetary and fiscal policy design. Economic agents … the policy regime using historical data. Regime uncertainty substantially narrows, relative to a rational expectations … analysis of the model, the menu of policies consistent with expectations stabilization. When agents are learning about the …

interest rate rule, raising the possibility of inefficient fluctuations due to the dependence of expectations on extraneous … combine forward looking expectations and predetermined variables. We consider a variety of specifications that incorporate …

We show that, when private sector expectations are determined in line with adaptive learning, optimal policy responds … expectations resemble optimal policy under commitment and rational expectations. Nevertheless, it is clear that the mechanism at … play is very different. In the case of commitment it relies on expectations of future policy actions affecting inflation …

This paper demonstrates that the adaptive learning approach to modelling private sector expectations can be used as an … the two rational expectations equilibria is stable under least-squares learning, and that it is always the low …

Keynesian model. We find that slightly departing from rational expectations substantially changes the way the central bank deals … (output gap) today or stabilizing it tomorrow. The central bank should optimally anchoring private agents expectations in the … short term in exchange of easier future intratemporal trade-offs. Compared to the rational expectations equilibrium, the …

This paper investigates how social network and conformity dynamics shape the stability of inflation expectations and … bank's inflation narrative, both inflation rate dispersion and the dispersion of expectations are substantially reduced … rational expectations following shocks, thereby mitigating both the magnitude and persistence of deviations. However …

intertemporal trade-off, not present under rational expectations: it is optimal to forego stabilizing the economy in the present in … actually has rational expectations is much smaller than if the central bank mistakenly assumes rational expectations when in …

The recent macroeconomic literature stresses the importance of managing heterogeneous expectations in the formulation … interest rate rules when agents have heterogeneous expectations and update their beliefs based on past performance as in Brock … converge to the rational expectations equilibrium as multiple equilibria may persist, even when a fully rational, but costly …