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RATIONAL VS. LONG-RUN FORECASTERS: OPTIMAL MONETARY POLICY AND THE ROLE OF INEQUALITY

  • Elton Beqiraj (a1), Giovanni Di Bartolomeo (a1) and Carolina Serpieri (a1)
Abstract

This paper builds a stylized simple sticky-price New Keynesian model where agents' beliefs are not homogeneous. We assume that agents choose optimal plans while considering forecasts of macroeconomic conditions over an infinite horizon. A fraction of them (boundedly rational agents) use heuristics to forecast macroeconomic variables over an infinite horizon. In our framework, we study optimal policies consistent with a second-order approximation of the policy objective from the consumers' utility function, assuming that the steady state is not distorted.

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Corresponding author
Address correspondence to: Giovanni Di Bartolomeo, Dipartimento di Economia e Diritto, Sapienza Università di Roma, via del Castro Laurenziano 9, 00161, Rome, Italy; e-mail: giovanni.dibartolomeo@uniroma1.it.
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The authors are grateful to Marco Di Pietro, Salvatore Nisticò, Bianca Giannini, Willi Semmler, Patrizio Tirelli for useful comments on earlier drafts. They have benefited from comments on the MTP workshop (Rome). The authors also acknowledge financial support by Sapienza University of Rome.

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Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
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