Book contents
- Frontmatter
- Contents
- List of figures
- List of tables
- List of contributors
- 1 Introduction
- 2 Welcome remarks: a Norwegian perspective
- 3 Reflections on inflation targeting
- 4 Inflation targeting at twenty: achievements and challenges
- 5 Inflation targeting twenty years on: where, when, why, with what effects and what lies ahead?
- 6 How did we get to inflation targeting and where do we need to go to now? A perspective from the US experience
- 7 Inflation control around the world: why are some countries more successful than others?
- 8 Targeting inflation in Asia and the Pacific: lessons from the recent past
- 9 Inflation targeting and asset prices
- 10 The optimal monetary policy instrument, inflation versus asset price targeting, and financial stability
- 11 Expectations, deflation traps and macroeconomic policy
- 12 Heterogeneous expectations, learning and European inflation dynamics
- 13 Inflation targeting and private sector forecasts
- 14 Inflation targeting, transparency and inflation forecasts: evidence from individual forecasters
- 15 Gauging the effectiveness of quantitative forward guidance: evidence from three inflation targeters
- 16 Macro-modelling with many models
- 17 Have crisis monetary policy initiatives jeopardised central bank independence?
- 18 Inflation targeting: learning the lessons from the financial crisis
- 19 The financial crisis as an opportunity to strengthen inflation-targeting frameworks
- 20 ‘Leaning against the wind’ is fine, but will often not be enough
- 21 Inflation targeting, capital requirements and ‘leaning against the wind’: some comments
- Index
12 - Heterogeneous expectations, learning and European inflation dynamics
Published online by Cambridge University Press: 05 October 2010
- Frontmatter
- Contents
- List of figures
- List of tables
- List of contributors
- 1 Introduction
- 2 Welcome remarks: a Norwegian perspective
- 3 Reflections on inflation targeting
- 4 Inflation targeting at twenty: achievements and challenges
- 5 Inflation targeting twenty years on: where, when, why, with what effects and what lies ahead?
- 6 How did we get to inflation targeting and where do we need to go to now? A perspective from the US experience
- 7 Inflation control around the world: why are some countries more successful than others?
- 8 Targeting inflation in Asia and the Pacific: lessons from the recent past
- 9 Inflation targeting and asset prices
- 10 The optimal monetary policy instrument, inflation versus asset price targeting, and financial stability
- 11 Expectations, deflation traps and macroeconomic policy
- 12 Heterogeneous expectations, learning and European inflation dynamics
- 13 Inflation targeting and private sector forecasts
- 14 Inflation targeting, transparency and inflation forecasts: evidence from individual forecasters
- 15 Gauging the effectiveness of quantitative forward guidance: evidence from three inflation targeters
- 16 Macro-modelling with many models
- 17 Have crisis monetary policy initiatives jeopardised central bank independence?
- 18 Inflation targeting: learning the lessons from the financial crisis
- 19 The financial crisis as an opportunity to strengthen inflation-targeting frameworks
- 20 ‘Leaning against the wind’ is fine, but will often not be enough
- 21 Inflation targeting, capital requirements and ‘leaning against the wind’: some comments
- Index
Summary
Introduction
Most central banks nowadays gear monetary policy directly towards maintaining a low and stable rate of inflation (IMF 2005: chap. 4). There are, of course, important differences between central banks. While some are explicit inflation targeters, others, such as the European Central Bank, have a numerical definition of price stability as the overriding objective of monetary policy (Gerlach and Schnabel 2000). In either case, however, an understanding of how the public forms inflation expectations is of crucial importance for policymakers.
From the 1970s onwards the idea that expectations are rational has dominated much of the literature. Lately a new view on expectations has emerged, which views economic agents as econometricians when forecasting (an extensive overview of this literature is provided by Evans and Honkapohja 2001). This approach, referred to as adaptive learning, assumes that economic agents are boundedly rational but employ statistical forecasting techniques, which allows for the possibility of a rational expectations equilibrium to be learnt in the long run. One important insight from the adaptive learning literature is that policies that may be optimal under rational expectations are not optimal when individuals use a learning process. Orphanides and Williams (2005) show that the optimal monetary policy under a learning process should respond more aggressively to inflation and become more focused on inflation stability than if expectations were rational, since tight inflation control can facilitate learning and provide better guidance for the formation of inflation expectations.
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- Information
- Twenty Years of Inflation TargetingLessons Learned and Future Prospects, pp. 261 - 305Publisher: Cambridge University PressPrint publication year: 2010
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