LEARNING, EXPERIMENTATION, AND MONETARY-POLICY

We present a model of monetary policy where the policymaker faces unce rtainty about which he is learning in a Bayesian fashion. A fixed mone y supply rule is not optimal since the learning leads to adjustments i n the monetary action. We present cases in which it is optimal to bear some cost in terms of current output performance in order to gain inf ormation that can be used in the formulation of future monetary policy : experimentation therefore pays. We also show that even passive learn ing without experimentation still leads to an activist monetary policy , i.e., one that is responsive to new information.