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On the perils of stabilizing prices when agents are learning

Mele, A, Molnar, K and Santoro, S (2014) On the perils of stabilizing prices when agents are learning [Report]

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Abstract

We show that price level stabilization is not optimal in an economy where agents have incomplete knowledge about the policy implemented and try to learn it. A systematically more accommodative policy than what agents expect generates short term gains without triggering an abrupt loss of con- fidence, since agents update expectations sluggishly. In the long run agents learn the policy implemented, and the economy converges to a rational expectations equilibrium in which policy does not stabilize prices, economic volatility is high, and agents suffer the corresponding welfare losses. However, these losses are outweighed by short term gains from the learning phase.

Item Type: Report
Authors :
AuthorsEmailORCID
Mele, AUNSPECIFIEDUNSPECIFIED
Molnar, KUNSPECIFIEDUNSPECIFIED
Santoro, SUNSPECIFIEDUNSPECIFIED
Date : 19 December 2014
Depositing User : Symplectic Elements
Date Deposited : 13 Jul 2016 13:31
Last Modified : 13 Jul 2016 13:31
URI: http://epubs.surrey.ac.uk/id/eprint/811200

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