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A Note on the Anchoring Effect of Explicit Inflation Targets

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Author Info
Jan Libich ()
Abstract

Empirical literature provided convincing evidence that explicit (ie legislated) inflation targets anchor expectations. We propose a novel game theoretic framework with generalized timing that allows us to formally capture this beneficial anchoring effect. Using the framework we identify several factors that influence whether and how strongly expectations are anchored, namely: (i) the public’s cost of decision-making, (ii) the public’s inflation aversion, (iii) the slope of the Phillips curve, (iv) the magnitude of supply shocks, (v) the degree of central bank conservatism, and under many (but not all) circumstances, (vi) the explicitness of the inflation target.

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File URL: http://cama.anu.edu.au/Working%20Papers/Papers/2009/Libich_212009.pdf
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Paper provided by Australian National University, Centre for Applied Macroeconomic Analysis in its series CAMA Working Papers with number 2009-21.

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Length: 15 pages
Date of creation: Aug 2009
Date of revision:
Handle: RePEc:acb:camaaa:2009-21

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E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization

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This page was last updated on 2009-12-2.

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