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Call for Papers: PIER Research Workshop 2025
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18 May 2016
20161463529600000
No. 028

Monetary Policy with Imperfect Knowledge in a Small Open Economy

Yu-chin ChenPisut Kulthanavit

Abstract

Incorporating adaptive learning into a small-open-economy DSGE model, we analyze how monetary policy rules should adjust when agents' information set deviates from that assumed under the rational expectations framework. We find that when agents observe current shocks but do not observe the parameters governing key macroeconomic dynamics, the resulting distortion is small and the preferred policy under rational expectations works well. However, the welfare cost of imperfect knowledge becomes quite severe when agents also have to learn about the structural shocks to the economy. Monetary policy can play a significant role in mitigating distortions associated with this form of imperfect knowledge.

Yu-chin Chen
Yu-chin Chen
Pisut Kulthanavit
Pisut Kulthanavit
Thammasat University
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JEL: D84E52F41
Tags: adaptive learningmonetary policy rulesopen economy
The views expressed in this workshop do not necessarily reflect the views of the Puey Ungphakorn Institute for Economic Research or the Bank of Thailand.
Yu-chin Chen
Yu-chin Chen
Pisut Kulthanavit
Pisut Kulthanavit
Thammasat University

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