Why should agent be myopic they can expect ination as

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Why should agent be myopic ? They can expect in±ation as well as economists ! Information is public π a t = E t ± 1 ( π t j I t ± 1 ) where I t is the information set available at period t ± 1. If there is no error in expectations (perfect expectation), then u t = μ α Class 5 Monetary Policy
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Rational Expectations John Muth Robert Lucas. Why should agent be myopic ? They can expect in±ation as well as economists ! Information is public π a t = E t ± 1 ( π t j I t ± 1 ) where I t is the information set available at period t ± 1. If there is no error in expectations (perfect expectation), then u t = μ α If the Central Bank "in±ation shocks" ε t which are surprises π t = E t ± 1 ( π t j I t ± 1 ) + ε t u t = μ ± ε t α Class 5 Monetary Policy
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Rational Expectations John Muth Robert Lucas. Why should agent be myopic ? They can expect in±ation as well as economists ! Information is public π a t = E t ± 1 ( π t j I t ± 1 ) where I t is the information set available at period t ± 1. If there is no error in expectations (perfect expectation), then u t = μ α If the Central Bank "in±ation shocks" ε t which are surprises π t = E t ± 1 ( π t j I t ± 1 ) + ε t u t = μ ± ε t α The e/ect of in±ation on unemployment can only be transitory and is e/ective if agents make mistakes. Class 5 Monetary Policy
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Rational Expectations II One can not design economic policies in a model where agents make some systematic mistakes (Irrational agents). Economic agents learn about the world where they live. A useful model for economists is a model where agents are modeled such that, if they knew the model, they would behave e/ectively as they behave in the model. Class 5 Monetary Policy
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The Natural Rate of Unemployment NAIRU : Non Accelerating In±ation Rate of Unemployment. Recall π t = π a t + μ ± α u t In the long run π t = π a t , it yields the in±ation rate, for which in±ation is constant u = μ α This in±ation rate decreases with the markup (with °scal and technology parameters z ). The parameter α represents "labor market ±exibility". The way unemployment a/ect wage bargaining. The higher α the lower the unemployment. Class 5 Monetary Policy
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How to measure NAIRU (The Intuition). One estimates π t = a ( L ) π t ± 1 + b ( L ) u t + c ( L ) z t + e t where L is the lag operator, or π t = a ( L ) π t ± 1 + b ( L ) ( u t ± u n t ) + c ( L ) z t + e t and u n t = u n t ± 1 + ε t Class 5 Monetary Policy
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NAIRU in the US From Gordon (1997), Journal of Economic Perspective Do we explain something ? not sure... Class 5 Monetary Policy
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Taylor Ryle Taylor (1993) °ds that a simple way to represent the behavior of central banks is r t = r ² + δ π ( π t ± π ² ) + δ Y ( y t ± y ² ) where, roughly δ Y = 0 . 5 and δ π = 1 . 5 . π ² is the in±ation target. y ² is the output gap. Class 5 Monetary Policy
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Simplest Monetary model (New keynesian economics) y t = E t y t + 1 ± 1 σ ( r t ± E t π t + 1 ) + u t π t = β E t π t + 1 + κ ( y t ± y ² ) + e t r t = r ² + δ π ( π t ± π ² ) + δ Y ( y t ± y ² ) + v t Three equations y t , π t and r t . IS curve, Phillips curve and Taylor rule.
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