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Inflation Expectations and Learning about Monetary Policy

Author

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  • David Andolfatto
  • Scott Hendry
  • Kevin Moran
Abstract
Various measures indicate that inflation expectations evolve sluggishly relative to actual inflation. In addition, they often fail conventional tests of unbiasedness. These observations are sometimes interpreted as evidence against rational expectations. The authors embed, within a standard monetary dynamic stochastic general-equilibrium model, an information friction and a learning mechanism regarding the interest-rate-targeting rule that monetary policy authorities follow. The learning mechanism enables optimizing economic agents to distinguish between transitory shocks to the policy rule and occasional shifts in the inflation target of monetary policy authorities. The model's simulated data are consistent with the empirical evidence. When the information friction is activated, simulated inflation expectations fail conventional unbiasedness tests much more frequently than in the complete-information case when this friction is shut down. These results suggest that an important size distortion may occur when conventional tests of unbiasedness are applied to relatively small samples dominated by a few significant shifts in monetary policy and sluggish learning about those shifts.

Suggested Citation

  • David Andolfatto & Scott Hendry & Kevin Moran, 2002. "Inflation Expectations and Learning about Monetary Policy," Staff Working Papers 02-30, Bank of Canada.
    • Handle: RePEc:bca:bocawp:02-30
    DOI: 10.34989/swp-2002-30
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Richhild Moessner, 2006. "Optimal discretionary policy in rational expectations models with regime switching," Bank of England working papers 299, Bank of England.
    2. Frank Schorfheide, 2005. "Learning and Monetary Policy Shifts," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 392-419, April.
    3. Svatopluk Kapounek & Lubor Lacina, 2011. "Inflation Perceptions and Anticipations in the Old Eurozone Member States," Prague Economic Papers, Prague University of Economics and Business, vol. 2011(2), pages 120-139.
    4. Dave Andolfatto & Scott Hendry & Kevin Moran, 2004. "Labour markets, liquidity, and monetary policy regimes," Canadian Journal of Economics, Canadian Economics Association, vol. 37(2), pages 392-420, May.
    5. Schaling, Eric, 2003. "Learning, inflation expectations and optimal monetary policy," Research Discussion Papers 20/2003, Bank of Finland.
    6. Maarten Dossche & Gerdie Everaert, 2005. "Measuring Inflation Persistence: A Structural Time Series Approach," Computing in Economics and Finance 2005 459, Society for Computational Economics.
    7. Schaling, E., 2003. "Learning, Inflation Reduction and Optimal Monetary Policy," Other publications TiSEM 49f6213d-93d9-4a5a-85ca-5, Tilburg University, School of Economics and Management.
    8. Schaling, E., 2003. "Learning, Inflation Reduction and Optimal Monetary Policy," Discussion Paper 2003-74, Tilburg University, Center for Economic Research.
    9. repec:zbw:bofrdp:2003_020 is not listed on IDEAS
    10. Friedrich Heinemann & Katrin Ullrich, 2006. "The Impact of EMU on Inflation Expectations," Open Economies Review, Springer, vol. 17(2), pages 175-195, April.
    11. Schaling, Eric, 2003. "Learning, inflation expectations and optimal monetary policy," Bank of Finland Research Discussion Papers 20/2003, Bank of Finland.
    12. Steffen Henzel, 2008. "Learning Trend Inflation – Can Signal Extraction Explain Survey Forecasts?," ifo Working Paper Series 55, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.

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    JEL classification:

    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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