Monetary policy and inflationary shocks under imperfect credibility
AbstractIn this note, we quantify the deterioration of achievable stabilization outcomes when monetary policy operates under imperfect credibility and weak anchoring of long-term expectations. Within a medium-scale Dynamic Stochastic General Equilibrium (DSGE) model, we introduce, through a simple signal extraction problem, an imperfect knowledge configuration in which price and wage setters wrongly have doubts about the determination of the central bank to maintain a fixed long-term inflation objective in the face of inflationary shocks. The magnitude of private sector learning has been calibrated to match the volatility of US inflation expectations at long horizons. We find that the costs of maintaining a given inflation volatility under weak credibility could amount to 0.25 percentage point (pp) of output gap standard deviation.
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Bibliographic InfoArticle provided by Elsevier in its journal Economics Letters.
Volume (Year): 116 (2012)
Issue (Month): 3 ()
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Web page: http://www.elsevier.com/locate/ecolet
Monetary policy; Imperfect credibility; Signal extraction;
Other versions of this item:
- Darracq Pariès, Matthieu & Moyen, Stéphane, 2009. "Monetary policy and inflationary shocks under imperfect credibility," Working Paper Series 1065, European Central Bank.
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
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