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Using a projection method to analyze inflation bias in a micro-founded model

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Author Info

  • Anderson, Gary S.
  • Kim, Jinill
  • Yun, Tack

Abstract

Since Kydland and Prescott (1977) and Barro and Gordon (1983), most studies of the problem of the inflation bias associated with discretionary monetary policy have assumed a quadratic loss function. We depart from the conventional linear-quadratic approach in favor of a projection method approach. We investigate the size of the inflation bias that arises in a microfounded nonlinear environment with Calvo price setting. The inflation bias is found to lie between 1% and 6% for a reasonable range of parameter values, when the bias is defined as the steady-state deviation of the discretionary inflation rate from the optimal inflation rate under commitment.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 9 (September)
Pages: 1572-1581

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:9:p:1572-1581

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Inflation bias Discretionary monetary policy Projection methods;

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References

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  1. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
  2. Robert G. King & Alexander L. Wolman, 2004. "Monetary discretion, pricing complementarity, and dynamic multiple equilibria," Working Paper 04-05, Federal Reserve Bank of Richmond.
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  11. Pierpaolo Benigno & Michael Woodford, 2004. "Optimal taxation in an RBC model: A linear-quadratic approach," Discussion Papers 0405-16, Columbia University, Department of Economics.
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  16. Willem Van Zandweghe & Alexander Wolman, 2011. "Discretionary monetary policy in the Calvo model," Working Paper 11-03, Federal Reserve Bank of Richmond.
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Cited by:
  1. Gary S. Anderson & Jinill Kim & Tack Yun, 2010. "Using a projection method to analyze inflation bias in a micro-founded model," Finance and Economics Discussion Series 2010-18, Board of Governors of the Federal Reserve System (U.S.).

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