Centre for Growth and Business Cycle Research Discussion Paper Series

‘Monetary policy with heterogeneous and misspecified expectations’

Michele Berardi

November 2006, Centre for Growth and Business Cycle Research Discussion Paper Series, University of Manchester, No. 81.  Download PDF file (356KB).

In recent literature on monetary policy and learning, it has been suggested that private sector’s expectations should play a role in the policy rule implemented by the central bank, as they could improve the ability of the policymaker to stabilize the economy. Private sector’s expectations, in
these studies, are often taken to be homogeneous and rational, at least in the limit of a learning process. In this paper, instead, we consider the case in which private agents are heterogeneous in their expectations formation mechanisms and hold heterogeneous expectations in equilibrium. We investigates the impact of this heterogeneity in expectations on central bank’s policy implementation and on the ensuing economic outcomes.