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A note on expectational stability under non-zero trend inflation

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  • Teruyoshi Kobayashi

    ()
    (Graduate School of Economics, Kobe University)

  • Ichiro Muto

    ()
    (Bank of Japan)

Abstract

This study examines the expectational stability of the rational expectations equilibria (REE) under alternative Taylor rules when trend inflation is non-zero. We find that when trend inflation is high, the REE is likely to be expectationally unstable. This result holds true regardless of the nature of the data (such as contemporaneous data, forecast, and lagged data) introduced in the Taylor rule. Our results suggest that a high macroeconomic volatility during the period of high trend inflation can be well explained by introducing the concept of expectational stability.

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File URL: http://www.econ.kobe-u.ac.jp/RePEc/koe/wpaper/2011/1102.pdf
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Bibliographic Info

Paper provided by Graduate School of Economics, Kobe University in its series Discussion Papers with number 1102.

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Length: 21pages
Date of creation: Apr 2011
Date of revision:
Handle: RePEc:koe:wpaper:1102

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Web page: http://www.econ.kobe-u.ac.jp
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Keywords: Adaptive learning; E-stability; Taylor rule; trend inflation;

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References

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  1. Michael T. Kiley, 2004. "Is moderate-to-high inflation inherently unstable?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2004-43, Board of Governors of the Federal Reserve System (U.S.).
  2. Bennett T. McCallum, 1997. "Issues in the Design of Monetary Policy Rules," NBER Working Papers 6016, National Bureau of Economic Research, Inc.
  3. Olivier Coibion & Yuriy Gorodnichenko, 2010. "Monetary Policy, Trend Inflation and the Great Moderation:An Alternative Interpretation," Working Papers, Department of Economics, College of William and Mary 94, Department of Economics, College of William and Mary.
  4. Olivier Blanchard & Giovanni Dell'Ariccia & Paolo Mauro, 2010. "Rethinking Macroeconomic Policy," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 42(s1), pages 199-215, 09.
  5. Bruce Preston, 2003. "Learning about monetary policy rules when long-horizon expectations matter," Working Paper, Federal Reserve Bank of Atlanta 2003-18, Federal Reserve Bank of Atlanta.
  6. Ichiro Muto, 2008. "Monetary Policy and Learning from the Central Bank's Forecast," IMES Discussion Paper Series, Institute for Monetary and Economic Studies, Bank of Japan 08-E-01, Institute for Monetary and Economic Studies, Bank of Japan.
  7. West, Kenneth D., 2007. "Comment on Argia M. Sbordone "Inflation persistence: Alternative interpretations and policy implications"," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(5), pages 1340-1343, July.
  8. Guido Ascari & Tiziano Ropele, 2005. "Trend Inflation, Taylor Principle and Indeterminacy," Working Papers, University of Milano-Bicocca, Department of Economics 93, University of Milano-Bicocca, Department of Economics, revised Oct 2005.
  9. Seppo Honkapohja & Kaushik Mitra & George W. Evans, 2011. "Notes on Agents¡¯ Behavioral Rules Under Adaptive Learning and Studies of Monetary Policy," CDMA Working Paper Series, Centre for Dynamic Macroeconomic Analysis 201102, Centre for Dynamic Macroeconomic Analysis.
  10. Guido Ascari, 2004. "Staggered prices and trend inflation: some nuisances," Macroeconomics, EconWPA 0404029, EconWPA.
  11. Kurozumi, Takushi, 2014. "Trend inflation, sticky prices, and expectational stability," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 42(C), pages 175-187.
  12. Seppo Honkapohja, 2003. "Discussion of Preston, "Learning about monetary policy rules when long-horizon expectations matter"," Working Paper, Federal Reserve Bank of Atlanta 2003-19, Federal Reserve Bank of Atlanta.
  13. Ascari, Guido & Ropele, Tiziano, 2007. "Optimal monetary policy under low trend inflation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(8), pages 2568-2583, November.
  14. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(6), pages 1105-1129, September.
  15. Preston, Bruce, 2006. "Adaptive learning, forecast-based instrument rules and monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(3), pages 507-535, April.
  16. Honkapohja, Seppo & Mitra, Kaushik, 2002. "Performance of monetary policy with internal central bank forecasting," Research Discussion Papers, Bank of Finland 3/2002, Bank of Finland.
  17. Sbordone, Argia M., 2007. "Inflation persistence: Alternative interpretations and policy implications," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(5), pages 1311-1339, July.
  18. Timothy Cogley & Argia M. Sbordone, 2008. "Trend Inflation, Indexation, and Inflation Persistence in the New Keynesian Phillips Curve," American Economic Review, American Economic Association, American Economic Association, vol. 98(5), pages 2101-26, December.
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Citations

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Cited by:
  1. Tesfaselassie, Mewael F., 2014. "Trend growth and learning about monetary policy rules," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 41(C), pages 241-256.
  2. Muto, Ichiro, 2011. "Monetary policy and learning from the central bank's forecast," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 35(1), pages 52-66, January.
  3. Guido Ascari & Anna Florio, 2012. "Transparency, Expectations Anchoring and the Inflation Target," DEM Working Papers Series, University of Pavia, Department of Economics and Management 022, University of Pavia, Department of Economics and Management.
  4. Guido Ascari & Argia M. Sbordone, 2013. "The macroeconomics of trend inflation," Staff Reports, Federal Reserve Bank of New York 628, Federal Reserve Bank of New York.
  5. Henning Weber, 2011. "Optimal inflation and firms' productivity dynamics," Kiel Working Papers 1685, Kiel Institute for the World Economy.
  6. Takushi Kurozumi & Willem Van Zandweghe, 2012. "Firm-specific labor, trend inflation, and equilibrium stability," Research Working Paper, Federal Reserve Bank of Kansas City RWP 12-09, Federal Reserve Bank of Kansas City.
  7. Henning Weber, 2012. "The Optimal Inflation Rate and Firm-Level Productivity Growth," Kiel Working Papers 1773, Kiel Institute for the World Economy.
  8. Kurozumi, Takushi, 2014. "Trend inflation, sticky prices, and expectational stability," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 42(C), pages 175-187.

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