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Robustly Optimal Monetary Policy with Near-Rational Expectations

Woodford, Michael

The paper considers optimal monetary stabilization policy in a forward-looking model, when the central bank recognizes that private sector expectations need not be precisely model-consistent, and wishes to choose a policy that will be as good as possible in the case of any beliefs that are close enough to model-consistency. It is found that commitment continues to be important for optimal policy, that the optimal long-run inflation target is unaffected by the degree of potential distortion of beliefs, and that optimal policy is even more history-dependent than if rational expectations are assumed.

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Title
American Economic Review
DOI
https://doi.org/10.1257/aer.100.1.274

More About This Work

Academic Units
Economics
Publisher
American Economic Association
Published Here
November 21, 2013