
Contents
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5.1 Introduction 5.1 Introduction
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5.2 A Narrative History 5.2 A Narrative History
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5.3.1 The Model 5.3.1 The Model
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5.3.2 Model Estimation and Calibration 5.3.2 Model Estimation and Calibration
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5.4.1 Optimal Control Monetary Policy 5.4.1 Optimal Control Monetary Policy
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5.4.2 Central Bank Natural Rate Estimates 5.4.2 Central Bank Natural Rate Estimates
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5.5 Expectations and Simulation Methods 5.5 Expectations and Simulation Methods
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5.5.1 Calibrating the Learning Rate 5.5.1 Calibrating the Learning Rate
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5.6 Model Simulations 5.6 Model Simulations
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5.6.1 Initial Conditions 5.6.1 Initial Conditions
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5.7 Performance of Optimal Control Policies 5.7 Performance of Optimal Control Policies
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5.8 Performance of a Simple Policy Rule 5.8 Performance of a Simple Policy Rule
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5.9 Conclusion 5.9 Conclusion
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References References
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Comment Comment
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Great Inflation and Imperfect Knowledge Great Inflation and Imperfect Knowledge
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Basic Ideas in Learning Models Basic Ideas in Learning Models
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Understanding the Main Results Understanding the Main Results
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Further Comments and Questions Further Comments and Questions
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References References
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5 Monetary Policy Mistakes and the Evolution of Inflation Expectations
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Published:June 2013
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Abstract
This chapter uses a three-equation model based on a New Keynesian Phillips curve, real-time data on the unemployment gap, and forecasted survey data on expected inflation to test the efficiency of the Federal Reserve’s pursuit of an optimal control approach to monetary policy that approximates the fine-tuning views of the New Economics prevalent in the 1960s and 1970s. It shows that the fine-tuning approach to monetary policy, with its emphasis on stabilizing the level of real activity, might have succeeded in stabilizing the economy if policymakers had possessed accurate real-time assessments of the natural rate of unemployment. In the event they did not, and failed to account for their imperfect information regarding the economy’s potential and the effects of these misperceptions on the evolution of inflation expectations and inflation.
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