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Inflation Expectations and Learning about Monetary Policy

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  • Andolfatto, David
  • Scott Hendry
  • Kevin Moran

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Paper provided by Bank of Canada in its series Working Papers with number 02-30.

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Length: 45 pages Abstract: Various measures indicate that inflation expectations evolve sluggishly relative to actual inflation. In addition, they often fail conventional tests of unbiasedness. These observations are sometimes interpreted as evidence against rational expectations. The authors embed, within a standard monetary dynamic stochastic general-equilibrium model, an information friction and a learning mechanism regarding the interest-rate-targeting rule that monetary policy authorities follow. The learning mechanism enables optimizing economic agents to distinguish between transitory shocks to the policy rule and occasional shifts in the inflation target of monetary policy authorities. The model's simulated data are consistent with the empirical evidence. When the information friction is activated, simulated inflation expectations fail conventional unbiasedness tests much more frequently than in the complete-information case when this friction is shut down. These results suggest that an important size distortion may occur when conventional tests of unbiasedness are applied to relatively small samples dominated by a few significant shifts in monetary policy and sluggish learning about those shifts.
Date of creation: 2002
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Handle: RePEc:bca:bocawp:02-30

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Keywords: Business fluctuations and cycles; Economic models;

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Cited by:
  1. Dave Andolfatto & Scott Hendry & Kevin Moran, 2004. "Labour markets, liquidity, and monetary policy regimes," Canadian Journal of Economics, Canadian Economics Association, vol. 37(2), pages 392-420, May.
  2. Steffen Henzel, 2008. "Learning Trend Inflation – Can Signal Extraction Explain Survey Forecasts?," Ifo Working Paper Series Ifo Working Paper No. 55, Ifo Institute for Economic Research at the University of Munich.
  3. Dossche, Maarten & Everaert, Gerdie, 2005. "Measuring inflation persistence: a structural time series approach," Working Paper Series 0495, European Central Bank.
  4. Frank Schorfheide, 2003. "Learning and monetary policy shifts," Working Paper 2003-23, Federal Reserve Bank of Atlanta.
  5. Richhild Moessner, 2006. "Optimal discretionary policy in rational expectations models with regime switching," Bank of England working papers 299, Bank of England.
  6. Rautureau, Nicolas, 2004. "Measuring the long-term perception of monetary policy and the term structure," Research Discussion Papers 12/2004, Bank of Finland.
  7. Schaling, Eric, 2003. "Learning, inflation expectations and optimal monetary policy," Research Discussion Papers 20/2003, Bank of Finland.
  8. Friedrich Heinemann & Katrin Ullrich, 2006. "The Impact of EMU on Inflation Expectations," Open Economies Review, Springer, vol. 17(2), pages 175-195, April.
  9. Svatopluk Kapounek & Lubor Lacina, 2011. "Inflation Perceptions and Anticipations in the Old Eurozone Member States," Prague Economic Papers, University of Economics, Prague, vol. 2011(2), pages 120-139.

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