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Monetary policy credibility and inflationary expectation

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  • Yuxiang, Karl
  • Chen, Zhongchang
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    Abstract

    Since there are significant biases in the individuals' inflationary expectations, the role of monetary policy credibility needs to be reconsidered. Theoretically, policy credibility can influence the policymaker's plan of action or reflect his preference. Thus, when prices rise, perceived credibility not only stabilizes public expectations of inflation, but also becomes important information, which can be used by the individuals to improve their expectations. The econometric analysis of a large-scale survey largely confirms these theoretical predictions. The perceived policy credibility as well as inflation perceptions and education plays an important role in the individuals' inflationary expectations.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Psychology.

    Volume (Year): 31 (2010)
    Issue (Month): 4 (August)
    Pages: 487-497

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    Handle: RePEc:eee:joepsy:v:31:y:2010:i:4:p:487-497

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

    Related research

    Keywords: Price change Inflation Price perception Expectations;

    References

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    1. David Backus & John Driffill, 1984. "Inflation and Reputation," Working Papers 560, Queen's University, Department of Economics.
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    14. Backus, David & Driffill, John, 1985. "Rational Expectations and Policy Credibility Following a Change in Regime," Review of Economic Studies, Wiley Blackwell, vol. 52(2), pages 211-21, April.
    15. Ranyard, Rob & Missier, Fabio Del & Bonini, Nicolao & Duxbury, Darren & Summers, Barbara, 2008. "Perceptions and expectations of price changes and inflation: A review and conceptual framework," Journal of Economic Psychology, Elsevier, vol. 29(4), pages 378-400, August.
    16. Jacobson, Robert & Obermiller, Carl, 1990. " The Formation of Expected Future Price: A Reference Price for Forward-Looking Consumers," Journal of Consumer Research, University of Chicago Press, vol. 16(4), pages 420-32, March.
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    Cited by:
    1. Yuxiang, Karl & Chen, Zhongchang, 2011. "Resource abundance and financial development: Evidence from China," Resources Policy, Elsevier, vol. 36(1), pages 72-79, March.

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