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Monetary Policy and Inflationary Shocks Under Imperfect Credibility

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Author Info
Matthieu Darracq Pariès () (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
Stéphane Moyen () (Deutsche Bundesbank, Taunusanlage 5, D-60329 Frankfurt am Main, Germany.)

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Abstract

This paper quantifies the deterioration of achievable stabilization 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 price 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 maintaining 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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Paper provided by European Central Bank in its series Working Paper Series with number 1065.

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Length: 21 pages
Date of creation: Jun 2009
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Handle: RePEc:ecb:ecbwps:20091065

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Related research
Keywords: Monetary policy; Imperfect credibility; Signal extraction.;

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  1. Beyer, Andreas & Gaspar, Vítor & Gerberding, Christina & Issing, Otmar, 2009. "Opting out of the great inflation: German monetary policy after the breakdown of Bretton Woods," Discussion Paper Series 1: Economic Studies 2009,12, Deutsche Bundesbank, Research Centre. [Downloadable!]
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  2. Mathias Drehmann & Kleopatra Nikolaou, 2009. "Funding Liquidity Risk: Definition and Measurement," Working Paper Series 1024, European Central Bank. [Downloadable!]
  3. Stephan Fahr & Fang Yao, 2009. "When does Lumpy Factor Adjustment Matter for Aggregate Dynamics?," Working Paper Series 1016, European Central Bank. [Downloadable!]
  4. Luca Benati, 2009. "Long Run Evidence on Money Growth and Inflation," Working Paper Series 1027, European Central Bank. [Downloadable!]
  5. Geert Bekaert & Marie Hoerova & Martin Scheicher, 2009. "What Do Asset Prices Have to Say About Risk Appetite and Uncertainty?," Working Paper Series 1037, European Central Bank. [Downloadable!]
  6. Sebastian Hauptmeier & Ferdinand Mittermaier & Johannes Rincke, 2009. "Fiscal competition over taxes and public inputs - theory and evidence," Working Paper Series 1033, European Central Bank. [Downloadable!]
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  7. Christoffel, Kai & Costain, James & de Walque, Gregory & Kuester, Keith & Linzert, Tobias & Millard, Stephen & Pierrard, Olivier, 2009. "Inflation dynamics with labour market matching: assessing alternative specifications," Bank of England working papers 375, Bank of England. [Downloadable!]
    Other versions:
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This page was last updated on 2009-12-1.

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