Learning and the Monetary Policy Strategy of the European Central Bank

This paper examines the welfare implications of alternative in-ation targeting proposals for the monetary policy of the European Central Bank. We assume that policy makers have to "learn " the laws of motion of ination in an economy characterized by "sticki-ness " in domestic price setting behavior and subjected to recurring shocks to productivity, exports and foreign price. We \u85nd that a switch from an "asymmetric " ination targeting strategy to a "sym-metric " makes little di¤erence in welfare payo¤s, but it comes at a cost of mugh higher interest-rate variability. We also \u85nd that there are practically no welfare gains from switching from an ination-targeting strategy based on the Harmonized Index of Consumer Prices (HICP) to a strategy based on the domestic price component of the HICP. Key Words: Ination targeting, central bank learning, monetary policy We would like to thank the discussant, Russ Boyer, and participants at the Tor Vergata Conference, Rome, December 2003 for very useful comments