Title: Optimal constrained interest-rate rules under heterogeneous expectations
Authors: Emanuel Gasteiger - Freie Universität Berlin (Germany) [presenting]
Abstract: The welfare consequences of heterogeneous expectations under optimal monetary policy are examined. To this end we develop a stochastic New Keynesian model with coexistence of one-step ahead rational and adaptive expectations. We argue that the incorporation of heterogeneous expectations in both the design and implementation of optimal monetary policy is welfare improving. Nevertheless, heterogeneous expectations imply an amplification mechanism that has many adverse consequences missing under the paradigm of homogeneous rational expectations. A more hawkish policy can be welfare improving. Credible commitment eliminates or mitigates many of the ramifications of heterogeneous expectations.