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  4. March 2010
  5. Robustly Optimal Monetary Policy with Near-Rational Expectations

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Robustly Optimal Monetary Policy with Near-Rational Expectations

  • Michael Woodford
American Economic Review
vol. 100, no. 1, March 2010
(pp. 274–303)
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Abstract

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. (JEL C62, D84, E13, E31, E32, E52)

Citation

Woodford, Michael. 2010. "Robustly Optimal Monetary Policy with Near-Rational Expectations." American Economic Review, 100 (1): 274–303. DOI: 10.1257/aer.100.1.274

Additional Materials

JEL Classification

  • C62 Existence and Stability Conditions of Equilibrium
  • D84 Expectations; Speculations
  • E13 General Aggregative Models: Neoclassical
  • E31 Price Level; Inflation; Deflation
  • E32 Business Fluctuations; Cycles
  • E52 Monetary Policy