Monetary policy with heterogeneous and misspecified expectations

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In the recent literature on monetary policy and learning, it has been suggested that private sector's expectations should play a role in the policy rule implemented by the central bank, as they could improve the ability of the policymaker to stabilize the economy. Private sector's expectations, in these studies, are often taken to be homogeneous and rational, at least in the limit of a learning process. In this paper, instead, we consider the case in which private agents are heterogeneous in their expectations formation mechanisms and hold heterogeneous expectations in equilibrium. We investigate the impact of this heterogeneity in expectations on central bank's policy implementation and on the ensuing economic outcomes, and the general result that emerges is that the central bank should disregard inaccurate private sector expectations and solely base its policy on the accurate ones. © 2009 The Ohio State University.
Original languageEnglish
Pages (from-to)79-100
Number of pages21
JournalJournal of Money, Credit and Banking
Issue number1
Publication statusPublished - Feb 2009


  • Adaptive learning
  • Expectations formation
  • Heterogenous expectations
  • Misspecifications
  • Monetary policy


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