Reserch Seminar
Speaker: Antonio Mele (University of Surrey)
On Monday, November 25 at 4.40pm International College of Economics and Finance held a research seminar.Speaker: Antonio Mele (University of Surrey)
Theme: «The suboptimality of commitment equilibriumwhen agents are learning»
Venue: Shabolovka st., 26, room 3209
Abstract: Standard monetary policy results show that it is optimal for a central bank to commit to a future course of action instead of choosing policy period by period. This is because by committing to a policy in the future, the central bank influences expectations about future inflation and therefore it is able to smooth the effect of economic shocks over several periods. However this result relies on the assumption that agents have rational expectations (i.e. they know exactly how the economy works). We relax this hypothesis, by assuming that agents know how the economy works but have some uncertainty about the value of crucial economic parameters, and therefore have to estimate them with some statistical technique. We show that monetary policy recommendations then change dramatically: the commitment policy is not optimal anymore neither in the short nor in the long run, and actually in the long run the optimal policy looks as if the central bank were choosing policy period by period.