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Adaptive Learning, Macroeconomic Expectation and the Optimal Monetary Policy in China
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TitleAdaptive Learning, Macroeconomic Expectation and the Optimal Monetary Policy in China  
AuthorBian Zhicun and Gao Jiechao  
OrganizationNanjing University of Finance and Economics; 
Key WordsAdaptive Learning; New Keynesian Model; Optimal Policy; Dynamic Simulation 
AbstractThe optimal monetary policy defined by the traditional framework of monetary policy is based on the quadratic loss function of the central bank. Some existing research has recently showed that the important standard of optimal policy is whether it could make the economy converge to the rational expectation equilibrium. From this perspective, this paper further explores how the different strategic interactions between the central bank and the public lead economy to deviation from the REE. First, it depicts the forming process of macro expectations through introducing adaptive learning in the framework of the New Keynesian model. Second, we calculate the deviation degree of economy to the REE and the level of mean and volatility of economy by using the method of dynamic numerical simulation under different strategic interactions. Last, we analyze the results above all and distinguish the optimal monetary policy. This paper shows flexible inflation target or mixed nominal income target could be used by the central bank to make the economy steady and develop in harmony. 
Serial NumberWP561 
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