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Inflation Target Transparency and the Macroeconomy

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  • Martin Melecky
  • Diego Rodríguez Palenzuela
  • Ulf Söderström

Abstract

We quantify the effects of monetary policy transparency and credibility on macroeconomic volatility in an estimated model of the Eurozone. In our model, private agents are unable to distinguish between temporary shocks to the central bank's monetary policy rule and persistent shifts in the inflation target, and therefore use optimal filtering techniques to construct estimates of the future monetary policy stance. We find that the macroeconomic benefits of credibly announcing the current level of the time-varying inflation target are reasonably small as long as private agents correctly understand the stochastic processes governing the inflation target and the temporary policy shock. If, on the other hand, private agents overestimate the volatility of the inflation target, the overall gains of announcing the target can be substantial. We also show that the central bank can, to some extent, help private agents in their learning process by responding more aggressively to deviations of inflation from the target.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 490.

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Date of creation: Oct 2008
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Handle: RePEc:chb:bcchwp:490

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Cited by:
  1. Patrick Fève & Julien Matheron & Jean-Guillaume Sahuc, 2010. "Inflation Target Shocks and Monetary Policy Inertia in the Euro Area," Economic Journal, Royal Economic Society, vol. 120(547), pages 1100-1124, 09.
  2. Paul Levine & Joseph Pearlman & Bo Yang, 2012. "Imperfect Information, Optimal Monetary Policy and Informational Consistency," School of Economics Discussion Papers 1012, School of Economics, University of Surrey.
  3. Valdivia, Daney & Loayza, Lilian, 2010. "Adopción de metas de inflación y su impacto en las expectativas de inflación y volatilidad del crecimiento económico: evidencia empírica para Bolivia
    [Inflation targeting and its impact on the
    ," MPRA Paper 37328, University Library of Munich, Germany, revised 25 Aug 2011.
  4. Marco Del Negro & Stefano Eusepi, 2010. "Fitting observed inflation expectations," Staff Reports 476, Federal Reserve Bank of New York.
  5. Krause, Michael U. & Moyen, Stéphane, 2013. "Public debt and changing inflation targets," Discussion Papers 06/2013, Deutsche Bundesbank, Research Centre.

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