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Credibility is not enough: the importance of common knowledge to anchor expectations

Author

Listed:
  • Marcelo de C. Griebeler

    (Federal University of Rio Grande do Sul)

  • Guilherme Stein

    (Foundation of Economic and Statistics)

Abstract

In a linear model, we show that when individuals form their inflation expectations taking into account the others' expectations, credibility - defined as the individual belief that the central bank is speaking the truth and has enough technical capacity to achieve the announced targets - is not sufficient to anchor the aggregate expectations. Instead, we show that it is necessary to add common knowledge of the individual credibility in order to guarantee anchoring.

Suggested Citation

  • Marcelo de C. Griebeler & Guilherme Stein, 2018. "Credibility is not enough: the importance of common knowledge to anchor expectations," Economics Bulletin, AccessEcon, vol. 38(2), pages 916-920.
    • Handle: RePEc:ebl:ecbull:eb-18-00010
    as

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    References listed on IDEAS

    as
    1. Allan Drazen & Paul R. Masson, 1994. "Credibility of Policies Versus Credibility of Policymakers," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(3), pages 735-754.
    2. Aloisio Araujo & Tiago Berriel & Rafael Santos, 2016. "Inflation Targeting With Imperfect Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57, pages 255-270, February.
    3. Alan S. Blinder, 2000. "Central-Bank Credibility: Why Do We Care? How Do We Build It?," American Economic Review, American Economic Association, vol. 90(5), pages 1421-1431, December.
    4. Blackburn, Keith & Christensen, Michael, 1989. "Monetary Policy and Policy Credibility: Theories and Evidence," Journal of Economic Literature, American Economic Association, vol. 27(1), pages 1-45, March.
    5. John Geanakoplos, 1992. "Common Knowledge," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 53-82, Fall.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    inflation expectations; credibility; common knowledge.;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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