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Learning About Inflation Measures for Interest Rate Rules

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  • Marco Airaudo
  • Luis-Felipe Zanna
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    Abstract

    Empirical evidence suggests that goods are highly heterogeneous with respect to the degree of price rigidity. We develop a DSGE model featuring heterogeneous nominal rigidities across two sectors to study the equilibrium determinacy and stability under adaptive learning for interest rate rules that respond to inflation measures differing in their degree of price stickiness. We find that rules responding to headline inflation measures that assign a positive weight to the inflation of the sector with low price stickiness are more prone to generate macroeconomic instability than rules that respond exclusively to the inflation of the sector with high price stickiness. By this we mean that they are more prone to induce non-learnable fundamental-driven equilibria, learnable self-fulfilling expectations equilibria, and equilibria where fluctuations are unbounded. We discuss how our results depend on the elasticity of substitution across goods, the degree of heterogeneity in price rigidity, as well as on the timing of the rule.

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    File URL: http://www.carloalberto.org/assets/working-papers/no.170.pdf
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    Bibliographic Info

    Paper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 170.

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    Length: 45 pages
    Date of creation: 2010
    Date of revision:
    Handle: RePEc:cca:wpaper:170

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    Related research

    Keywords: Learning; Expectational Stability; Interest Rate Rules; Multiple Equilibria; Determinacy; Multiple Sectors;

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