Optimal constrained interest-rate rules under heterogeneous expectations

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