Events

Dr. Seunghoon NA
Assistant Professor
Department of Economics
Purdue University

We investigate robustly optimal monetary policy in a small open economy New Keynesian model where private agents form potentially distorted near-rational expectations (NRE). The model predicts that following a cost-push shock, the robustly optimal monetary policy calls for a slower response of domestic inflation and a greater initial response of the nominal exchange rate, as the central bank’s concerns about distorted expectations increase. We estimate the models for Canada and Mexico by using the Bayesian method. Mexico exhibits a significant deviation from the rational expectation (RE) benchmark, whereas Canada shows a small deviation. The estimated NRE model for Mexico also successfully predicts the historical dynamics of the monetary policy rate and key moments of the CPI inflation rate, demonstrating that the monetary policy has been implemented with substantial concerns about private agents’ distorted expectations.