Unpredictable market sentiments speed up learning for optimal monetary policy control.
The article discusses how uncertainty in interest rates affects monetary policy under inflation targeting. When economic expectations are tied to inflation and output levels, the central bank faces uncertainty about demand and inflation persistence. Learning about this uncertainty is faster with higher inflation and output gap variability, leading to better long-term inflation control. Passive and active learning scenarios impact how interest rates respond to the economy, influencing short-term monetary policy.