Learning, Experimentation and Monetary Policy

We present a model of monetary policy where the policymaker faces uncertainty about wich he is learning in a Bayesian fashion. A fixed money supply levels. A fixed money supply rule is not optimal in this context since the learning leads to constant adjustments in money supply levels. We present cases in which it is optimal to bear some cost in terms of current output performance in order to gain information that can be used in the formulation of future monetary policy : experimentation therefore pays. We also show that even passive learning without experimentation still leads to an activist monetary policy, i.e. one that is constantly changing in response to new information.

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