This paper analyzes monetary policy in a model with a potential unanchoring of inflation expectations. The degree of unanchoring is given by how sensitively the public's long-run inflation expectations respond to inflation surprises. I find that optimal policy moves the interest rate...

We study zero interest-rate policy in response to a large negative demand shock when long-run expectations can fall over time. Because falling expectations make monetary policy less effective by raising real interest rates, the optimal forward guidance policy makes large front-loaded promises to...

The present paper studies the effect of monetary policy on inflation and output within a New Keynesian model with Experience-Based Learning (EBL) that renders expectations heterogeneous across age groups. Under EBL, the age-distribution directly affects the composition of aggregate expectations...

This paper estimates a New Keynesian model with a nonlinearity in the monetary policy rule to capture the practice of inflation targeting with target zones or tolerance bands. Private-sector agents form subjective expectations, update their beliefs over time using a perceived model of the...

This paper investigates the role that imperfect knowledge about the structure of the economy plays in the formation of expectations, macroeconomic dynamics, and the efficient formulation of monetary policy. Economic agents rely on an adaptive learning technology to form expectations and to...

In this paper we analyse disinflation policy in two environments. In the first, the central bank has perfect knowledge, in the sense that it understands and observes the process by which private sector inflation expectations are generated; in the second, the central bank has to learn the private...

In a standard new Keynesian framework we derive the conditions under which increasing the inflation target does not deliver expectational instability. We consider two monetary policy regimes with respect to information about the inflation target. Under transparency, there is full disclosure of...

Empirical evidence suggests consumers rely on their shopping experiences to form beliefs about inflation. In other words, they "learn by shopping". I introduce this empirical observation as an informational friction in the New Keynesian model and use it to study its consequences for the...

The recent macroeconomic literature stresses the importance of managing heterogeneous expectations in the formulation of monetary policy. We use a stylized macro model of Howitt (1992) to investigate inflation dynamics under alternative interest rate rules when agents have heterogeneous...

Expectations play a crucial role in modern macroeconomic models. We consider a New Keynesian framework under a behavioral model of expectation formation and under rational expectations. Contrary to the rational model, the behavioral model predicts that inflation volatility can be lowered if the...