I would like to thank Domenico Delli Gatti, John Duffy and Ben McCallum for comments on an early version of this paper. I am also grateful to two anonymous referees for their comments and suggestions. All remaining errors are, of course, my own.
Monetary Policy with Heterogeneous and Misspecified Expectations
Article first published online: 22 JAN 2009
© 2009 The Ohio State University
Journal of Money, Credit and Banking
Volume 41, Issue 1, pages 79–100, February 2009
How to Cite
BERARDI, M. (2009), Monetary Policy with Heterogeneous and Misspecified Expectations. Journal of Money, Credit and Banking, 41: 79–100. doi: 10.1111/j.1538-4616.2008.00188.x
- Issue published online: 22 JAN 2009
- Article first published online: 22 JAN 2009
- Received April 30, 2007; and accepted in revised form June 27, 2008.
- adaptive learning;
- expectations formation;
- heterogenous expectations;
- monetary policy
In the recent literature on monetary policy and learning, it has been suggested that private sector's expectations should play a role in the policy rule implemented by the central bank, as they could improve the ability of the policymaker to stabilize the economy. Private sector's expectations, in these studies, are often taken to be homogeneous and rational, at least in the limit of a learning process. In this paper, instead, we consider the case in which private agents are heterogeneous in their expectations formation mechanisms and hold heterogeneous expectations in equilibrium. We investigate the impact of this heterogeneity in expectations on central bank's policy implementation and on the ensuing economic outcomes, and the general result that emerges is that the central bank should disregard inaccurate private sector expectations and solely base its policy on the accurate ones.