The New Keynesian Model with Imperfect Information and Learning

The standard version of the new Keynesian model has important, well known, empirical limitations, in particular with regard to inflation and interest rate dynamics following a monetary shock.We demonstrate how the introduction of a modest amount of imperfect information and gradual learning suffices to fix these flaws.The modified model generates inflation persistence, realistic inflation and output dynamics and a liquidity effect.Moreover, the overall fitness of the model -according to standard moments criteria-is also better for imperfect information version relative to the standard version.