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Heterogeneous beliefs and inflation dynamics: a general equilibrium approach

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Fabià Gumbau-Brisa

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Abstract

This paper looks at the implications of heterogeneous beliefs for inflation dynamics. Following a monetary policy shock, inflation peaks after output, is inertial, and can be characterized by a Hybrid Phillips Curve. It presents a novel channel through which systematic monetary policy can affect the degree of inflation persistence. It does so by altering the effective extent of strategic complementarities in pricing, and hence the role of higher-order expectations in the equilibrium. In particular, stronger inflation targeting reduces the impact of uncertainty on the economy and therefore the degree of inertia. It is possible to calibrate at around 25 percent the fraction of relevant information processed every period by the private sector. The imperfect common knowledge framework does not require any exogenous shocks to create heterogeneity. Despite the fact that prices can be adjusted at no cost in every period, there are nominal rigidities, and monetary policy has real effects.

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Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 05-16.

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Date of creation: 2005
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Handle: RePEc:fip:fedbwp:05-16

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Keywords: Inflation (Finance);

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  7. Mankiw, N Gregory, 2001. "The Inexorable and Mysterious Tradeoff between Inflation and Unemployment," Economic Journal, Royal Economic Society, vol. 111(471), pages C45-61, May. [Downloadable!] (restricted)
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  29. Stephen Morris & Hyun Song Shin, 2000. "Rethinking Multiple Equilibria in Macroeconomic Modelling," Cowles Foundation Discussion Papers 1260, Cowles Foundation, Yale University. [Downloadable!]
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  30. Jeff Fuhrer, 2005. "Intrinsic and inherited inflation persistence," Working Papers 05-8, Federal Reserve Bank of Boston. [Downloadable!]
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  31. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland. [Downloadable!]
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  32. William Kerr & Robert G. King, 1996. "Limits on interest rate rules in the IS model," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 47-75. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Adam Hale Shapiro, 2006. "Estimating the New Keynesian Phillips Curve: a vertical production chain approach," Working Papers 06-11, Federal Reserve Bank of Boston. [Downloadable!]
    Other versions:
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