This paper reevaluates the basic prescriptions of monetary policy design in the new
Keynesian paradigm through the lens of imperfect knowledge. We show that while the basic
logic of monetary policy design under rational expectations continues to obtain, perfect
knowledge and learning can limit the set of policies available to central banks, rendering
expectations management in general more difficult. Nonetheless, the desirability of some
form of price-level targeting, inducing inertia in interest-rate policy, paramount under rational …

New Keynesian theory identifies a set of principles central to the design and implementation
of monetary policy. These principles rely on the ability of a central bank to manage
expectations precisely, with policy prescriptions typically derived under the assumption of
perfect information and full rationality. In consequence the prevailing policy regime is
credible and correctly understood by market participants. Despite considerable advances in
understanding, recent events have engendered a re-evaluation of the theory and practice of …