Author: Woodford, Michael

Source: The American Economic Review, Volume 100, Number 1, March 2010 , pp. 274-303(30)

Publisher: American Economic Association

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.

Document Type: Research article

DOI: http://dx.doi.org/10.1257/aer.100.1.274

Publication date: 2010-03-01

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• The American Economic Review is a general-interest economics journal. The journal is published quarterly and contains articles on a broad range of topics. Established in 1911, the AER is among the nation's oldest and most respected scholarly journals in the economics profession.
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