Learning and the Central Bank

Working papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views stated herein are those of the authors and are not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System. It is well known that sunspot equilibria may arise under an interest rate operating procedure in which the central bank varies the nominal rate with movements in future inflation (a forward-looking Taylor rule). This paper demonstrates that these sunspot equilibria may be learnable in the sense of E-stability.