Monetary policy, learning and the speed of convergence

Under the assumption of bounded rationality, economic agents learn from their past mistaken predictions by combining new and old information to form new beliefs. The purpose of this paper is to investigate how the policy-maker, by affecting private agents' learning process, determines the speed at which the economy converges to the rational expectation equilibrium. I find that by reacting strongly to private agents' expected inflation, a central bank increases the speed of convergence and shortens the length of the transition to the rational expectation equilibrium. I use speed of convergence as an additional criterion for evaluating alternative monetary policies. I find that a fast convergence is not always desirable. (C) 2006 Elsevier B.V. All rights reserved.