Learning about the Inflation Target Very Preliminary, Comments Welcome

This paper studies optimal monetary policy under discretion when private agents learn about an uncertain economic structure. The central question investigated is how substantially the introduction of optimal policymaking reduces the ability of the model to capture central features of post World War II U.S. inflation and output dynamics, as compared to a simple, linear policy rule. To introduce learning into a small Phillips curve model of inflation, I assume that the private sector cannot directly observe the central bank’s inflation target and the persistence of inflation. I estimate the model both under optimal policymaking and under the simple rule. Results indicate that the optimal policy is substantially more aggressive than the simple rule