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Monetary policy and inflationary shocks under imperfect credibility

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  • Darracq Pariès, Matthieu
  • Moyen, Stéphane

Abstract

This paper quantifies the deterioration of achievable tabilization outcomes when monetary policy operates under imperfect credibility and weak anchoring of long-term expectations. Within a medium-scale DSGE model, we introduce through a simple signal extraction problem, an imperfect knowledge configuration where rice and wage setters wrongly doubt about the determination of the central bank to leave unchanged its long-term inflation objective in the face of inflationary shocks. The magnitude of private sector learning has been calibrated to match the volatility of US inflation expectations at long horizons. Given such illustrative calibrations, we find that the costs of aintaining a given inflation volatility under weak credibility could amount to 0.25 pp of output gap standard deviation. JEL Classification: E4, E5, F4

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1065.

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Date of creation: Jun 2009
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Handle: RePEc:ecb:ecbwps:20091065

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Keywords: Imperfect credibility; monetary policy; Signal extraction;

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  1. Christopher J. Erceg & Andrew T. Levin, 2001. "Imperfect credibility and inflation persistence," Finance and Economics Discussion Series 2001-45, Board of Governors of the Federal Reserve System (U.S.).
  2. Beechey, Meredith J & Johannsen, Benjamin K & Levin, Andrew, 2007. "Are Long-Run Inflation Expectations Anchored More Firmly in the Euro Area than in the United States?," CEPR Discussion Papers 6536, C.E.P.R. Discussion Papers.
  3. Smets, Frank & Wouters, Raf, 2007. "Shocks and frictions in US business cycles: a Bayesian DSGE approach," Working Paper Series 0722, European Central Bank.
  4. Luca Benati, 2008. "Investigating Inflation Persistence Across Monetary Regimes," The Quarterly Journal of Economics, MIT Press, vol. 123(3), pages 1005-1060, August.
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Cited by:
  1. Avadanei, Andreea, 2011. "Implicații ale politicii monetare unice în susținerea integrării financiare europene
    [The implications of single monetary policy in sustaining European financial integration]
    ," MPRA Paper 29147, University Library of Munich, Germany.
  2. Krause, Michael U. & Moyen, Stéphane, 2013. "Public debt and changing inflation targets," Discussion Papers 06/2013, Deutsche Bundesbank, Research Centre.

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