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E. Gasteiger:
"Optimal Constrained Interest-Rate Rules under Heterogeneous Expectations";
Bericht für ECON WPS - Working Papers in Economic Theory and Policy; Berichts-Nr. 04/2021, 2021; 11 S.

This paper examines optimal monetary policy under heterogeneous expectations. To this
end, we develop a stochastic New Keynesian model with a cost-push shock and coexistence
of one-step-ahead rational and adaptive expectations in decentralized markets. On the one
side, heterogeneous expectations imply an amplification mechanism that has many adverse
consequences missing under the rational expectations paradigm. On the other side, even
discretionary optimal monetary policy can manipulate expectations via a novel channel. We
argue that the incorporation of heterogeneous expectations in both the design and implemen tation of discretionary optimal monetary policy to exploit this channel lowers macroeconomic
volatility. We find that: (1.) surprisingly, a more hawkish policy can reduce losses due to
volatility, but an overly hawkish policy does not; (2.) overestimating the share of rational
expectations in the design and implementation of policy creates additional losses, while the
underestimation does not; (3.) credible commitment eliminates or mitigates many of the
ramifications of heterogeneous expectations.

heterogeneous expectations, optimal monetary policy, policy design, policy im plementation