Expectation Formation and Monetary Policy in an Agent-Based Model
Abstract
Inflation expectations are of fundamental importance for the conduct of monetary policy. This thesis examines to what extend inflation expectations and different inflation expectation formation mechanisms influence the conduct and the effectiveness of an inflation targeting monetary policy regime. Investigations are conducted within the framework of an agent-based computational model, which is built in due consideration of a model development process including model description, classification, implementation, verification and validation. Monetary policy is most effective when agents' inflation expectations are homogeneous and perfectly anchored at the inflation target. Heterogeneous perception of the target value, as well as partial credibility of the central bank’s announcements make monetary policy significantly less effective. The simulation results consequentially rationalize the importance of the active management of agents' inflation expectations in the conduct of monetary policy.
