Learning and signals under discretionary monetary policy

This paper aims at assessing the relevance of communicating central bank’s forecasts to the private sector under discretionary monetary pol- icy. In a New Keynesian environment, the central bank and the private sector have different information sets. The private sector uses the cen- tral bank’s expectations as a signal in order to update its priors, which are constituted by standard adaptive learning expectations. E-stability is positively affected by a high correlation between actual inflation and the signal about inflation. Numerical simulations show that the presence of signals is beneficial both in the long and in the short run.