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The Science of Monetary Policy: An Imperfect Knowledge Perspective

Stefano Eusepi¹; Bruce Preston²

¹ Federal Reserve Bank of New York · ² The University of Melbourne

This paper reevaluates the basic prescriptions of monetary policy design in the new Keynesian paradigm through the lens of imperfect knowledge. We show that while the basic logic of monetary policy design under rational expectations continues to obtain, perfect knowledge and learning can limit the set of policies available to central banks, rendering expectations management in general more difficult. Nonetheless, the desirability of some form of price-level targeting, inducing inertia in interest-rate policy, paramount under rational expectations, is robust to the assumption of imperfect knowledge. (JEL D84, E13, E31, E52, E58)

DOI

10.1257/jel.20160889

Volume

56 (1)

Pages

3-59

Language

en

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