We investigate how real-time parameter learning, optimal policies and the volatility of exogenous shocks affect the policymakers' ability to distinguish across competing models of the economy. The detection speed of model misspecification depends only on the relative volatility of supply and demand shocks. (C) 2011 Elsevier B.V. All rights reserved.
Optimal monetary policy and model selection in a real-time learning environment
Ravenna, Federico
2012-01-01
Abstract
We investigate how real-time parameter learning, optimal policies and the volatility of exogenous shocks affect the policymakers' ability to distinguish across competing models of the economy. The detection speed of model misspecification depends only on the relative volatility of supply and demand shocks. (C) 2011 Elsevier B.V. All rights reserved.
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