Temporary Acceleration of Inflation: What Can a Central Bank Learn from It?

In this article I present a model in which the monetary authority conducts policy by setting money supply in the presence of uncertainty and Bayesian learning about the economic environment. I find that there exists a set of assumptions under which a temporary acceleration of money growth and thus of inflation increases the government's overall expected utility. There also exists a set of assumptions under which a temporary deceleration of money growth and thus of inflation increases the government's overall expected utility.