BANK OF FINLAND DISCUSSION PAPERS

Transcription

1 BANK OF FINLAND DISCUSSION PAPERS Martin Ellison Lucio Sarno Jouko Vilmunen Research Department Monetary policy and learning in an open economy Suomen Pankin keskustelualoitteita Finlands Banks diskussionsunderlag

2 Suomen Pankki Bank of Finland P.O.Box 160 FIN HELSINKI Finland

3 BANK OF FINLAND DISCUSSION PAPERS Martin Ellison* Lucio Sarno** Jouko Vilmunen*** Research Department Monetary policy and learning in an open economy The views expressed are those of the authors and do not necessarily reflect the views of the Bank of Finland. We thank participants at the 2 nd Anglo-French Macroeconomics Workshop, Oxford, 2003, for helpful comments and suggestions. * University of Warwick and CEPR. Corresponding author, Department of Economics, University of Warwick, Coventry, CV4 7AL, United Kingdom. Tel , Fax , martin.ellison@warwick.ac.uk. ** Warwick Business School and CEPR. *** Bank of Finland. Suomen Pankin keskustelualoitteita Finlands Banks diskussionsunderlag

4 ISBN ISSN (print) ISBN ISSN (online) Suomen Pankin monistuskeskus Helsinki 2004

5 Monetary policy and learning in an open economy Bank of Finland Discussion Papers 3/2004 Martin Ellison Lucio Sarno Jouko Vilmunen Research Department Abstract In this paper, we examine the incentives for central bank activism and caution in a two-country open-economy model with uncertainty and learning. We find that the presence of a strategic interaction between the home and foreign central banks creates an additional motivation for caution in monetary policy. An activist policy designed to help the learning of the home central bank is suboptimal since it generates a strong reaction from the foreign central bank. As joint learning by the home and foreign central banks is shown to be detrimental to welfare, the optimal policy is cautious. Key words: activism, learning, monetary policy, open economy JEL classification numbers: D81, D83, E52, E58, F41 3

6 Oppiminen ja rahapolitiikka avoimessa taloudessa Suomen Pankin keskustelualoitteita 3/2004 Martin Ellison Lucio Sarno Jouko Vilmunen Tutkimusosasto Tiivistelmä Tässä tutkimuksessa tarkastellaan optimaalisen rahapolitiikan määräytymistä kahden avoimen talouden tapauksessa, jossa keskuspankin oppiminen liittyy sen pyrkimyksiin päivittää oma käsityksensä inflaation aktiivisuuvaikutusten suuruudesta. Tutkimuksessa osoitetaan, että koti- ja ulkomaisen rahapolitiikan strateginen vuorovaikutus lisää syytä varovaisuuteen rahapolitiikassa. Aktivistinen rahapolitiikka, jonka tarkoituksena on edistää keskuspankin oppimisprosessia, ei ole optimaalista, koska se laukaisee voimakkaan vastareaktion ulkomaisen keskuspankin taholta. Tasapainossa aktivistinen tai kokeileva kotimaan rahapolitiikka ei näin ollen edistä hyvinvointia, mistä puolestaan seuraa, että optimaalinen rahapolitiikka korostaa varovaisuutta. Avainsanat: rahapolitiikka, oppiminen, avoin talous JEL-luokittelu: D81, D83, E52, E58, F41 4

7 Contents Abstract Introduction The model Structure of the open economy Central bank loss function Beliefs Learning Equilibrium Calibration Results Passive learning policy Active learning policy Sensitivity analysis Conclusions...20 References...21 Appendix A. Numerical approximation of the active learning policy

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27 BANK OF FINLAND DISCUSSION PAPERS ISSN , print; ISSN , online 1/2004 Jukka Railavo Stability consequences of fiscal policy rules p. ISBN , print; ISBN , online. (TU) 2/2004 Lauri Kajanoja Extracting growth and inflation expectations from financial market data p. ISBN , print; ISBN , online. (TU) 3/2004 Martin Ellison Lucio Sarno Jouko Vilmunen Monetary policy and learning in an open economy p. ISBN , print; ISBN , online. (TU)