{
  "title": "How Do Adaptive Learning Expectations Rationalize Stronger Monetary Policy Response in Brazil?",
  "publication": "IMF Working Papers, January 27, 2023",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2023/01/27/how-do-adaptive-learning-expectations-rationalize-stronger-monetary-policy-response-in-528063",
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  "summary": "This paper estimates a standard Dynamic Stochastic General Equilibrium (DSGE) model that includes a wage and price Phillip's curves with different expectation formation processes for Brazil and the USA.",
  "sections": [
    {
      "heading": "Research question and model",
      "content": "- Estimates a standard Dynamic Stochastic General Equilibrium (DSGE) model that includes a wage and price Phillip's curves with different expectation formation processes for Brazil and the USA.\n- Compares two expectation formation processes:\n  - Rational expectation process.\n  - Adaptive learning model (limited rationality)."
    },
    {
      "heading": "Key empirical findings",
      "content": "- The adaptive learning model does a better job in fitting the data in both Brazil and the USA.\n- Expectations are more backward-looking and started to drift away sooner in 2021 in Brazil than in the USA.\n- The separate inclusion of a labor market in the model helps to anchor inflation even when:\n  - Expectations are adaptive,\n  - There is a positive output gap,\n  - Inflation is above target."
    },
    {
      "heading": "Optimal policy exercises and policy implications",
      "content": "- Optimal policy exercises prescribe early monetary policy tightening in the context of:\n  - Positive output gaps,\n  - Inflation far above the central bank target.\n- Implication: Stronger and earlier monetary policy responses are rationalized when expectations follow adaptive learning and labor-market dynamics are accounted for."
    },
    {
      "heading": "Subjects and keywords",
      "content": "- Subjects: Central bank policy rate, Economic sectors, Financial crises, Financial services, Inflation, Labor, Output gap, Prices, Production, Real wages, Wage gap.\n- Keywords: Bayesian estimation., Central bank policy rate, DSGE, Forecasting and Simulation, Global, Inflation, Inflation dynamics, inflation expectation, learning expectation, optimal monetary policy, Output gap, Real wages, Wage gap, wages expectation.\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2023/01/27/how-do-adaptive-learning-expectations-rationalize-stronger-monetary-policy-response-in-528063"
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    "Authors: Allan Dizioli, Hou Wang",
    "Published: January 27, 2023",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9798400229954.001",
    "Estimates a standard Dynamic Stochastic General Equilibrium (DSGE) model that includes a wage and price Phillip's curves with different expectation formation processes for Brazil and the USA.",
    "Compares two expectation formation processes:",
    "The adaptive learning model does a better job in fitting the data in both Brazil and the USA.",
    "Expectations are more backward-looking and started to drift away sooner in 2021 in Brazil than in the USA.",
    "The separate inclusion of a labor market in the model helps to anchor inflation even when:",
    "Optimal policy exercises prescribe early monetary policy tightening in the context of:",
    "Implication: Stronger and earlier monetary policy responses are rationalized when expectations follow adaptive learning and labor-market dynamics are accounted for.",
    "Subjects: Central bank policy rate, Economic sectors, Financial crises, Financial services, Inflation, Labor, Output gap, Prices, Production, Real wages, Wage gap.",
    "Keywords: Bayesian estimation., Central bank policy rate, DSGE, Forecasting and Simulation, Global, Inflation, Inflation dynamics, inflation expectation, learning expectation, optimal monetary policy, Output gap, Real wages, Wage gap, wages expectation.",
    "**Working Paper**"
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