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Inflation Target Shocks and Monetary Policy Inertia in the Euro Area

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  • Fève, Patrick
  • Matheron, Julien
  • Sahuc, Jean-Guillaume

Abstract

The euro area as a whole has experienced a marked downward trend in inflation over the past decades and, concomitantly, a protracted period of depressed activity. Can permanent and gradual shifts in monetary policy be held responsible for these dynamics? To answer this question, we embed serially correlated changes in the inflation target into a DSGE model with real and nominal frictions. The formal Bayesian estimation of the model suggests that gradual changes in the inflation target have played a major role in the euro area business cycle. Counter-factual exercises show that, had monetary policy implemented its new inflation objective at a faster rate, the euro zone would have experienced more sustained growth than it actually did.

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Bibliographic Info

Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/12493.

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Date of creation: 2010
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Publication status: Published in Economic Journal, 2010, Vol. 120, no. 547. pp. 1100-1124.Length: 24 pages
Handle: RePEc:dau:papers:123456789/12493

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Keywords: Permanent inflation target shocks; Monetary policy inertia; DSGE models; Bayesian econometrics;

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Cited by:
  1. Franke, Reiner & Jang, Tae-Seok & Sacht, Stephen, 2012. "Moment matching versus Bayesian estimation: Backward-looking behaviour in a New-Keynesian baseline model," Economics Working Papers 2012-08, Christian-Albrechts-University of Kiel, Department of Economics.
  2. Benchimol, Jonathan & Fourçans, André, 2009. "Money in a DSGE framework with an application to the Euro Zone," ESSEC Working Papers DR 09005, ESSEC Research Center, ESSEC Business School.
  3. Franke, Reiner & Jang, Tae-Seok & Sacht, Stephen, 2011. "Moment matching versus Bayesian estimation: Backward-looking behaviour in the new-Keynesian three-equations model," Economics Working Papers 2011,10, Christian-Albrechts-University of Kiel, Department of Economics.
  4. Benchimol, Jonathan & Fourçans, André, 2012. "The role of money and monetary policy in crisis periods: the Euro area case," ESSEC Working Papers WP1201, ESSEC Research Center, ESSEC Business School, revised 27 Feb 2012.

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