  I study a static textbook model of monetary policy and relax the conventional
assumption that the private sector has rational expectations. Instead, the
private sector forms inflation forecasts according to a misspecified subjective
model that disagrees with the central bank's (true) model over the causal
underpinnings of the Phillips Curve. Following the AI/Statistics literature on
Bayesian Networks, I represent the private sector's model by a direct acyclic
graph (DAG). I show that when the private sector's model reverses the direction
of causality between inflation and output, the central bank's optimal policy
can exhibit an attenuation effect that is sensitive to the noisiness of the
true inflation-output equations.
