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Optimal monetary policy and model selection in a real-time learning environment

Authors
Journal
Economics Letters
0165-1765
Publisher
Elsevier
Volume
114
Issue
3
Identifiers
DOI: 10.1016/j.econlet.2011.11.011
Keywords
  • Learning
  • Optimal Monetary Policy
  • Model Misspecification
  • Business Cycle
Disciplines
  • Economics

Abstract

Highlights ► We study the problem of a central bank that must select the true model across competing alternatives. ► Central banks should not deviate from the full-information optimal policy to speed up learning. ► Private sector’s learning does not affect the speed of selection of the true model. ► Selection of the true model is hampered in an economy with volatile demand shocks.

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